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Unbundling Will Boost Boutiques

Traders Magazine Online News, July 5, 2017

Shanny Basar

Gerard Walsh at Northern Trust Capital Markets is from New Zealand and said the removal of protectionism from the country’s dairy industry unleashed a wave of innovation. He believes innovation will disrupt the research industry as regulations in the European Union from next year will require the separation of payments for research from trading commissions.

MiFID II comes into force in January next year and requires fund managers to either pay for research themselves or from a research payment account, where the budget has been agreed with the client. Asset managers can designate a third party to administer the RPA on their behalf but also have to track their consumption of research and assess its quality.

Walsh told Markets Media that some think there is too much capacity in research and unbundling will force an assessment of the value added to the investment process. “To add a lot of value, research will have to include different ways of thinking and more unique, challenging and non-consensual ideas,” he added.

McKinsey & Company also said in a report this month, Reinventing Equity Research as a Profit-Making Business, that banks and broker-dealers will need to change the types of research they provide to focus on services, such as access to analysts and corporate managements, and new forms of information and analytics through big data and artificial intelligence. For example, long-only and hedge fund managers are reportedly hiring data scientists to generate returns from insights from sources such as mall parking lots, social media, and weather satellites, as well as market data.

The consultancy continued that the transformation of research to a free-standing profit center will alter the industry’s economics, and raise some difficult decisions. “McKinsey’s view is that there will be an end to equity research as we know it,” added the report.

Walsh said: “Overall capacity might not decrease but more specialised boutiques may well be set up and it is possible larger firms could sponsor boutiques. For example, technology firms have data and processing power and deep wallets. They could disrupt research."

He continued that in a few years “passive research” could emerge, where there is automated analysis of quarterly earnings. “The industry may then have a version of bulge bracket provision alongside boutiques,” said Walsh.

For example, Bloomberg reported today that three Barclays analysts in New York have left the bank to start a boutique, Melius Research, ahead of MiFID II.

McKinsey said the consensus amongst banks was an industry-wide drop in equity research revenues of 30% or more over the next three years. The report said: “Independent research providers should see a gain in revenues from current levels, suggesting that the revenue pool for banks and brokers will likely shrink even further.”

A survey from RSRCHXchange said research budgets are expected to be relatively stable going forwards but 77% of respondents expect the number of providers to fall and 80% said they will buy research from less than five bulge bracket banks. RSRCHXchange, an aggregator and marketplace for institutional research, commissioned Survation to conduct an online poll which had 562 respondents from more than 450 asset managers, predominantly in Europe.

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