With the forced unbundling of research costs, regulators have knowingly or unknowingly unleashed an environment of introspection. There will be an intense examination of whether the research budget is delivering value. One of the biggest positive impacts of MiFID II is an expected improvement in the quality of research.
Evolution of research product structure
Pricing models will result in structured research menus for investment managers. Portfolio managers will have to closely review the kind of research input, considering that they must pay for it now. So far, this decision was only about procuring data. Research is ultimately a combination of data, information, and insight. Data has already been commoditized, and information is also commonly available. The evolving research pricing structure is pointing in that direction.
Lowest in the hierarchy of such research is the general commentaries, market and news summaries, in most cases, this will be provided for free. Research providers produce research in the form of basic written reports covering equities, credit and interest rate views. Slightly above this in the value chain would be the financial model, and the highest being actual face-time/talk-time with the analyst.
The research pricing will settle down to a reasonable pricing for the basic research. However, premium services will be highly differentiated and will depend on the true perceived value of the analyst’s insight.
But how do you determine the right price for research?
The two key elements to consider is the value of research input and its price. And as financial market participants, we all know only too well, that most of the time there is a healthy disconnect between the two. There is a considerable effort being made to determine the value of research in a methodical manner because the value of research will determine the price for it.
Quality and Value of a research input
Interestingly, there is a very simple and methodical way through which investment managers can get a sense of the value of research. An important indicator of value and quality of a research piece is how many people actually read it and who those people are. In any investment organisation, research is consumed across various levels right from CIO, portfolio manager, senior analyst to the junior analyst. A knowledge management system that enables this in the least possible time will give clear and consistent results.
While that may be the case for the basic written research report, what about analyst insights gained through a conversation on the phone? Emerging processes seem to indicate a methodology that involves rating by the user after an exchange. There is a methodology by which this could be deepened again by using a methodical knowledge management system.
Again, this can have a methodical approach that will provide clear input on how these are evaluated, specifically having the portfolio manager/analyst file a call report, along with a rating. This call report can also be shared in the knowledge management platform so that it becomes available to everyone in the organisation. So, along with the rating, there are also data points showing how many people who read the call report.
Investment management businesses will increasingly optimize their research budgets using various tools available to get maximum ROI on their research spends.
This article was originally shared here.