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MiFID Unbundling - Easy to say, but hard to deliver

Updated: Nov 17, 2020

I attended the Substantive Research Unbundling Uncovered MiFID research conference in November. The panels at this event were made up of a mix of market participants and vendors. The mix made for some entertaining exchanges between brokers and investment managers on the true value of research. One broker opined that some asset managers may feel that because they now pay for research via P&L they may feel they do not owe either clients or brokers a duty of transparency. However, it was noted by one of the investment firms that they now must be able to explain their spend to their own CFO, who was definitely scarier than most clients or brokers.

Amongst the banter, there were several strong themes:

Data – At least every third sentence, and sometimes more often, mentioned data. This is another area of finance where quality data and its correct interpretation is crucial to delivering efficiency and realising value. The market and regulators fixation on mass interaction data, needs an effective tool to turn it into value. It needs to allow differentiation between the tracking data of which reports, calls or events have been delivered and linkage to value of which items or set of linked items provide the most value compared to cost.

Relationship – Whilst the organisation of data is important, the consensus was that there is a move from quantity to quality and that a key part of that quality is built through relationships. It is these relationships that may initially be built through the quantity of an base platform delivery, but consummated through targeted 1:1 manager to analyst conversations based on the understanding built by a good broker relationship.

Coverage – There was interesting debate on what MiFID II had done for the depth of coverage of companies and the quality impact of any change of the number of analysts had on the quality of research overall. Whilst there were diverging opinions, there was some consensus that the coverage and quality of research of smaller cap stocks had suffered.

Transparency – a key way of improving data quality and relationships is transparency. For example, various buy side firms talked of telling sell side firms what interactions they valued, and those they did not, as a “free” way of building a better relationship and getting more future value. They felt this worked just so long as you had the cleansed quality interaction data, and a strong understanding of what generated the most business benefit. Given this narrative from several and varied investment firms, it was interesting to hear from at least one major broker that they felt that, in aggregate, transparency had gone down significantly across their client set. The explanation of this may be that only a small number of investment managers have tools that allowed them to solve the data quality problem.

So what? What is the economic impact of these themes on research?

The message is that the reduction in the prices charged for research may have been overdone since MiFID II was implemented. This has had unintended consequences, such as some reductions in coverage, that did not benefit asset managers. Also, that whilst the overall volume of sellside research and interactions had reduced, better quality research and relationships are worth paying for. This is evidenced by an upward trend in pricing for quality research delivered in a way that matches the needs of the investment firm. This delivery mechanism must be backed by relevant, proven data shared between the parties, not to mention the likely hybrid (not just P&L) payment model faced by a typical global firm. All easy to say, but hard to deliver.

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