By Stuart Berwick, CEO, Singletrack
Since the 2008 banking crisis regulation has become increasingly global; fundamental changes in the operation and economics of the institutional equity market will manifest themselves in the US, even though they originate elsewhere. In the new era, regulatory creep will be driven by the inevitable harmonization of operations and compliance procedures at global asset managers, the largest being American.
Asset management and investment banking are global businesses – the relationships between them are typically assessed from a global perspective that transcends their relationship in any one country. So MiFID II, the changing economic arrangements around research and service provision between banks/brokers and asset managers in the UK, is likely to have an impact on those arrangements in other markets.
All UK-based funds will have to comply with the new MiFID regulations, but as the top UK asset managers include several major US firms, this also creates a potential dilemma for global players. It is difficult for the Head of Legal or Compliance at a large US manager to explain why the firm’s UK institutional clients are granted certain advantages (limits on the amount of their commission spent on research) versus their US counterparts whose research spending is theoretically unlimited. Increasingly, managers operate to the standard in the most conservative jurisdiction in which they operate.
Also, global managers typically prefer to run one, rather than multiple commission management systems in different regions. The UK introduction of Commission Sharing Agreements (CSAs) was a case in point. Once the London subsidiaries of US firms started using the product to meet UK regulatory requirements, a number of firms rolled the process out globally. We expect the same thing to occur with monetary research budgeting. Furthermore asset owners frequently employ asset managers in multiple regions. Here too we expect that, over time, they will hold their managers to ‘best practice’ globally.
This global regulatory ‘feedback loop’ will mean that these regulatory changes will impact on many US-based asset managers. So research producers serving US asset managers should be fully prepared for the changes; banks and brokers that do not meet their new and evolving client data requirements could struggle to maintain market share in both research and execution.
From the asset manager’s perspective, MiFID II requires that managers:
- Understand at a very granular level what research and related services they have consumed from their research providers
- Use this data to enable them to continue to use their client’s commission to pay for that specific research and related services
Given the complexity of collecting this data, particularly for large asset managers with potentially hundreds of investment professionals in multiple offices, and given the lack of existing systems at most asset managers to do so, the buy side will be looking to their research providers to help them.
MiFID II takes effect from January 2018, marking a new era in terms of transparent pricing, subscription based entitlements, fine grained consumption metrics and delivering the data clients will need to meet their new reporting obligations. And for the first time, equities and fixed income research will be accounted for in much the same way.
The changes don’t begin and end with the requirements of MiFiD II. Apart from the likelihood of further regulations, the sell-side also faces the challenge of growing client expectations and the need to accommodate changes in mobile access, digital authoring and the growing role and influence of social media. Meanwhile the research marketing landscape is evolving with the emergence of a new range of services and venues, including online markets for unbundled research, commission management systems and roadshow aggregators, which any MiFID solution will have to integrate with.
Under MiFID II asset managers will be much more structured and discriminating about the research products/services they select, and the price and underlying value of the research will be subject to much closer scrutiny. Given the complexity of collecting the necessary data to justify research spending, they are already turning to their research providers to help them in the process. So the pressure is on the sell-side to review the process of service provision, and provide more detailed data in order that the buy-side can accurately and consistently measure, value and report their consumption.
Subscriptions to products and services
While asset managers have grown used to a waterfront ‘unlimited access to everything’ model, the new regulations are expected to give rise to a variety of management scenarios to control and monitor use of research and corporate access services. This will require a very fine-grained preference and entitlement methodology, which enables clients to be set up with subscriptions having entitlements appropriate for their tier of service, and also aligned with their preferences as individual portfolio managers or buy side analysts. And to ensure that entitlement and preference settings are visible, fully representative and up to date, access management should be put directly into the hands of account managers, salespeople and analysts, rather than being hidden away in a system.
Measure, record and report all client interactions and service provision
Firms can position themselves to protect research revenues, and enable asset managers to justify research spending, by recording and reporting research and service consumption at a very granular level. This requires systems that can capture and provide the necessary data, tracking all aspects of relevant buy-side interaction and service provision, whether it’s email or phone communications, meetings, roadshows, research distribution, or consumption monitoring across multiple channels. And for maximum transparency comprehensive records of client interactions should be consolidated in one place in a readily searchable format, with the facilities to track, quantify, analyse and report on the services provided. The aim is to organise, execute and measure all workflows and consumption, while providing the metrics required to justify compensation and meet clients’ reporting requirements.
Treat Fixed Income more like Equities
MiFID II requires that certain asset classes such as fixed income, where research costs are currently included in the spread, be treated more like equities and priced accordingly for the first time. While the revenue mechanisms are unlikely to change, with payment based on trading spread, rather than on equity commissions, the measurement and value of different forms of client interaction will become increasingly important. With little commercial transparency around the value of fixed income research to-date, the industry will have to make a bigger leap to comply with the emerging regulations. Firms will have to think about new revenue models for their content, including subscription based content and adopt tools that are already being exploited by the equities firms.
Harness digital content
There’s growing interest in digital authoring because as well as providing institutional investors with superior information and an enhanced user experience, it also provides far more detailed consumption metrics and gives research providers more scope to protect and tier access to their content. It’s possible to align the digital content produced by the new authoring tools with fine grained entitlement and preference settings, and distributes it, over multiple channels, to mobile devices and via email or research aggregators.
In 2018 the client research portal will take on a whole new role, emerging as a high value online relationship building tool that will complement aggregator services. A well designed, fully interactive research portal will be a major differentiating asset; it will support easy access to and consumption of relevant content, and provide real-time client interaction & preference intelligence for effective marketing and cross-selling activity. A well-designed portal will be wholly consistent with your firm’s look and feel, and build a ‘shop window’ to highlight your own distinct competitive strengths. It will maintain full records for client reporting and compensation and watermark downloaded documents.
There has been much discussion of the threat to revenues, to coverage and liquidity, which is sure to impact some firms, but there is another dimension to MiFID readiness. The nature and volume of the data - covering all aspects of client interaction and service consumption - that must be routinely captured, stored and reported under MiFID can be leveraged to provide highly valuable business intelligence. With the right tools, firms can use this data to capitalise upon their own competitive strengths and build more profitable client relationships.
For example, greater visibility of how an individual piece of research content performs can provide a guide to pricing, client preferences, product life cycles and the most effective authoring styles. It also provides the opportunity to show clients additional content based on what they’re already subscribed to, or what other clients with similar profiles have consumed.
With the right systems in place, MiFID readiness can produce a new raft of valuable business intelligence which can be categorised as follows:
- Pricing and subscription
Transparency - clear pricing for all subscription packages, reports and analysts’ time
Pay as you go functionality
Managed research budgets with analysis of usage data
Tracking of invoices and payments
- Client/content filtering capabilities by:
Content type – trade ideas, quarterly publications etc
Asset Class – associating individual clients to asset class(es)
Author – client receives content from specific authors
Sector – specifying sector content
Region – as a filter to align with location or specific interests
- Search functionality
Location of specific content and publishers.
Ability to browse all authorised reports - search titles and all text - with real time access
Finding relevant reports from existing research relationships.
Viewing the content of a personalised library
- Content management & publishing
Managing and editing content layout
Alerting clients to new and high value ideas/reports.
Automated distribution consistent with individual client subscription preferences
Client ratings - to highlight popular content
Tracking client readership trends
- Readership Analytics
Real time client readership statistics (fed to CRM)
Real time trending feedback
Visibility of the performance of individual items of content
The maintenance of detailed records also provides the basis of client review reports and invoices to ensure that all activities can be fully monetized. The scope for giving individual, profit generating clients a more personalised, bespoke service with the facility for timely promotion of content that they are most likely to be interested in is significant. It all adds up to a powerful, evidence based platform for maximising the return on all aspects of research content provision and related services.
For more information on MiFID II readiness and solutions please visit www.singletrack.com
About the author
Prior to co-founding Singletrack, Stuart Berwick spent a decade in business and technology leadership roles in the capital markets business units of major investment banks. As global head of Research technology for JP Morgan, Stuart led a large and diverse team of technologists spread across Europe, the US and Asia, developing and supporting innovative content management, collaboration and analytics solutions both for internal trading groups and the bank's institutional and hedge fund clients.
Singletrack’s MiFID ready CRM, client engagement and research monetisation systems are used by leading institutional brokers, investment banks and Independent Research Providers on four continents.