This is the second in a three-part series of articles to help US asset and hedge fund managers answer their clients’ questions about the unbundling of payments for research and trading and understand what a best in class research management system looks like.
Unbundling of payment for research and trading may come to the US markets; how it will play out is an open question currently being debated by the Securities and Exchange Commission (SEC). There is growing pressure on the regulator from several large asset managers to harmonise the rules with Europe, which has separated the payment for the two functions under the revised Markets in Financial Instruments Directive (MiFID II).
As EU firms have been through this process already, it is worth considering where investment firms tripped up and how to avoid that in the US market.
First mover advantage
Firstly, with the whole market going through the same process, it may be tempting to hang back and engage in the process late. The argument for doing this, is that one has to wait for the final rules before complying. However, asset managers will find that institutional investors want to know how big of an issue this might be – even before there is certainty.
Asset managers that have not started assessing the impact – through analysis of research consumption, expenditure and other sell-side services – will struggle to answer the most basic questions. The key takeaway is to start early, and answer questions with confidence.
Don’t be side-tracked
The big discussion point during the unbundling process was how to manage research in a commercial model, but this often put the issue of corporate access in the shade and some asset managers pushed this down the track. To assess both, firms need to build a single picture of use, cost and value. While banks are very willing to provide data for clients regarding corporate access and research consumption, there are practical challenges to using it which increases the buy-side workload. As sell-side firms do not provide data in a standardised format, each data set has to be manually gathered by the front office and then normalised to create a single set of data. It is possible to automate this process, however the data will still need to be standardised and aggregated prior to analysis.
A more efficient approach is for buy-side firms to collect their own data, reducing the interference in front office activity and enabling standardised data from the offset to combine corporate access and research consumption.
The cost of everything
The third issue was the process of setting a price for research and corporate access. Where asset managers are informed on cost and value, they can work in advance and be a price maker. This helps the sell-side work out market value for their services and makes the price formation process more efficient. It is also valuable to look at the market prices in Europe, to consider the relative value of services.
One size fits nobody
The fourth issue was the inappropriateness of setting trial periods in paying for research, over a fixed length of time for a whole asset management firm. As this created an artificial limit around the testing process, it meant buy-side firms struggled to assess value for all funds equally.
The fifth and final issue was the risk of unintended consequences. If sell-side sales staff were no longer being remunerated in the same way, the impact on service levels, for example in curating research content, could be affected. It is worth mapping out the process and working out where action could be taken to minimize any possible impact to service levels.