By Smartkarma Content
Things used to be straightforward.
Investment banks provided a range of services to their buy-side clients, bundling a bunch of those services together (investment research included), and pocketing some tidy sums in commission fees. They certainly didn’t have to worry about selling sell-side research separately, much less look for new clients, like corporates – which is what they are doing now.
Things change.
The unbundling of research costs that MiFID II brought led to cascading changes in the market – but in many ways, it simply exposed the problems that lurked there before.
Now, with profits dropping and margins closing, with analysts and research providers increasingly out of a job and striking out on their own, and with the buy-side afraid to pick up the phone lest they incur charges under the new regime, investment banks like Morgan Stanley and Goldman Sachs are turning to a new potential revenue source: selling research to corporates.
It’s not hard to see why investment banks are going that route. With fees dropping precipitously, the profits among them fluctuate.
According to research by Accenture, the top-four players in the world (all based in the US) generate around US$20 billion or more in annual revenue and are profitable, but others are “not earning their cost of equity, partly because they haven’t restructured their business fast enough or haven’t been able to afford necessary investments.”
Persistent Problems
This recent development has met scepticism. The market is wary of sell-side research because for a long time it has maintained a firm hold on the industry. This has resulted in a glut of repetitive research, waterfront reports, and questionable objectivity.
The problems with traditional sell-side and research are important because they will also be present when dealing with corporates.
When it comes to research, the traditional sell-side can offer quantity, there’s no doubt about that. Even with investment banks shedding thousands of analyst jobs, there are still armies of professionals toiling in the mines, extracting reports and analysis out of the market data sediment. People in the buy-side know all too well what it’s like to have their inboxes flooded with PDFs that sometimes aren’t even relevant to their mandates.
While the buy-side doesn’t think research quality changed much after MiFID II came into force, perhaps this isn’t saying much – other than they probably did not have very high regard for sell-side research.
But this is to be expected – when inexorable demand meets with nigh-unlimited supply, it’s easy to leave quality control out of that equation. The question is, do corporates really want to receive an abundance of low-quality research, on top of all the other communications they have to field?
Conflicts of interest are another big one. Bias in research reports has been a persistent problem. If an investment bank is advising on a particular IPO, does it really want its analysts to put out bearish views on that potential listing?
Imagine, then, not wanting to charge corporates for research that doesn’t paint the company in the best light. With such a track record, who is to tell if corporates are getting their money’s worth or if they’re simply buying feel-good fluff? In a time when corporates seem compelled to care about more than just rewarding their shareholders, it’s even more important for them to get accurate reports about their own company and industry.
Distribution is also a problem, according to some investment banks. Simon Bound, head of research for Morgan Stanley, told the FT: “We’re set up to distribute research to asset managers, hedge funds, and wealth managers – not corporates.”
This is a clear indication that, even with the sheer firepower and deep pockets that investment banks can bring to the fore, one size does not fit all.
This means that there is a need for solutions that fill the gap between investors, corporates, and research providers. Technology, data, and an ecosystem that can directly connect all stakeholders are vital elements of such solutions, as well as the ability to be truly independent and free of conflicts of interest.
Lead image by energepic.com on Pexels
First published on: Smartkarma
