Investment Managers Valuing Research – is it under control?
It is now 9 months since the introduction of MiFID 2 and we often read in the financial press the challenges buy-side firms are having with the implementation - especially relating to research services. In the course of our daily business we have spoken to many of those on the buy-side, from very small to very large firms, on a neutral basis. We thought it would be interesting to share some of our findings.
The buy-side is split with those who now pay directly for research from their own P/L whilst others continue to pay through the fund and therefore fall under the MIFID II directive. It seems that a common thought by those who pay through their P/L is that this alleviates the requirements from the regulator. Others, however, believe, probably correctly, that by not valuing the research services they receive opens them up under the inducement rules. Remember it is not just research reports but calls and meetings that also need to be valued.
The overriding finding is that many firms are relying on the sell side to provide research consumption data. However, comments suggest this is unsatisfactory. The sell side provide data, usually directly from their Client Management Systems. These are only accurate if they are updated accurately and correctly. We have heard comments that supplied data includes cancelled calls, cancelled meetings and even voicemails. This is the consumption data that is being used to negotiate research service agreements. Without their own data the buy-side are in a weak negotiating position.
A comment we recently heard from a buy-side CIO summed up the main challenge -
…’We are struggling to find a way to accurately create a qualitative data set of our own without burdening our investment professionals. We want to use this data to automatically calculate implied values of interactions across all of our sell-side providers to aid in the management of research costs and going forward, the re-negotiations of research agreements…’
As a company working with the buy-side community (and the sell side), we are constantly having in-depth conversations as to the practicalities of MiFID 2 and common issues are experienced by most firms when it comes to valuing research.
1. Relying on sell-side data alone (which some, not all, firms are doing) is creating many inaccuracies and difficult to corelate for cost and budget purposes (known vs the unknown).
2. Getting investment professionals to validate or rate research services is challenging to sometimes impossible as most systems used are outside their work flow and time consuming especially if the data is backward looking.
3. Research agreements vary widely with little consistency in terms of cost and conditions (across the buy-side industry)
4. Valuing research services is skewed in favour of the sell-side as they have all the data on the consumption side
Many firms realise that they need to create a data set of their own to help balance out any sell-side consumption related data (for example, for budget reasons or re-negotiating agreements) but again struggle to get it implemented as it still requires an investment professional to do something. It is this behavioural change which most agree needs to happen but would rather not overburden their teams to do.
When we look around the market to find technology vendors who can help with all of the issues the buy-side are struggling with on this subject, we find a common trend – most rely solely on or heavily skewed in favour of sell-side inputs and are mostly web based systems with very little flexibility (big box hard coded software which does not account for the fact that all firms are different as are their users). One firm commented that they adopted such a system and it was just not used. Other solutions simply look to evaluate research reports – but this is only a part of the solution.
We have come across one company which has created something that we think is quite unique and highly differentiated – we could be wrong but have not found a similar yet. Quintain Analytics are a data technology firm based in London who offer attribution and cost management solutions for the buy-side investment community. Via a fully integrated in-the-workflow solution (not another web-based system) their products enable buy-side firms to create their own data set of valued interactions and manage their research agreements. Firms can opt to get their investment professionals to do nothing (but not rely on sell-side consumption only) or a little (again its very flexible) to enrich their data set giving CIOs, COOs, Compliance and investment professionals a stronger ability to manage their research costs taking into account individual research agreements. Importantly, Quintain Analytics solutions are fully compatible with any other system firms may be using.
What do we like most about Quintain Analytics? They get it….The Co-founders come from the industry and have developed all their products with the buy-side user perspective in mind. They understand that investment professionals are short on time and have very little patience for new technology systems but most importantly, make it highly customisable (at no additional cost – something most technology vendors like to charge more for) to aid in overall speed, simplicity and above all adoption. Outputs are also in a user’s workflow enabling easy visualisation of data extracts again customised depending on the user’s requirements. Quintain Analytics solutions are also extremely affordable and given the appetite for buy-side firms to spend additional money on research service related items is a very welcome element to their product line-up.
Quintain Analytics website at https://quintainanalytics.com/ and they have recently written an interesting white paper worth a read. If you are interested to talk to or meet the management please let us know. If you want to talk to Finceler8 about this topic then please get in touch.