Literally no one knows the true ‘value’ of research, not even the investment banks that are selling it. Up until now, equity research has been treated as a ‘freebie’ given away to institutional clients in return for trading commissions but that is all about to change thanks to the European Union’s MiFID II regulations, which require asset managers to separate trading commissions from investment-research payments.
Unfortunately, at least for the Investment Banks of the world, while the cost of generating equity research may be substantial, it turns out that the true ‘value’, as defined by institutional clients’ maximum willingness to pay for reports, may be much less. Which is shocking given the creativity required to constantly generate new variations of daily reports politely suggesting that you “Buy The Fucking Dip.”
But, as banks try to figure out their ‘value add’, the bid ask spread, at least according to Bloomberg, ranges from about $50,000 for a basic, annual fixed income package up to $600,000. In other words, at least 1 investment bank thinks their research is worth roughly 6 full-time, dedicated junior analysts.
As a European ban on bundling research with brokerage services looms, banks are sounding out asset managers and hedge funds on what they’d be prepared to pay. Money managers say they’re getting quoted $50,000 for a basic package from JPMorgan Chase & Co.’s fixed-income analysts. But no firm is allowing itself to be pinned down quite yet.
One senior manager at one of the largest European asset managers said JPMorgan’s move to price at the cheaper end of the scale was an attempt to win market share from rivals. The executive said the big investment banks were pricing fixed-income research packages around $250,000, but one European bank had proposed charging nothing for two years as an introductory offer, only to be batted down by EU regulators. Another asset manager has been quoted about $600,000 for credit research.
Deutsche Bank AG and Commerzbank AG are pitching a metered, “pay as you go” approach for smaller investors less able to swallow large, up-front subscriptions, according to three people, who asked not to be identified as pricing discussions are commercially sensitive. For the largest hedge funds, all-inclusive packages are on offer, with perks such as VIP analyst access, conference discounts and unlimited research notes.
“We are still waiting for banks to say definitively how much and what you get for certain prices,” said Richard Benson, a London-based managing director and co-head of portfolio investment at Millennium Global Investments Ltd., which oversees $14 billion. Quotes “range from very low to the hundreds of thousands, but I doubt we’ll have clarity this side of the summer break.” He declined to comment on pricing from specific institutions.
Of course, research was never actually ‘free’, it was just disguised as trading commissions and Integrity Research figures that funds spend roughly $75,000 per annum for access to the largest research groups.
Integrity Research, a U.S. consultancy, estimates investment banks currently effectively charge clients $75,000 a year on average for access to their analysts’ publications, based on its own extrapolations from banks’ pricing systems and a poll of about 70 firms. Among boutique research-only houses, U.S.-based MoffettNathanson LLC, which focuses on telecom and media, commands annual subscriptions of $100,000, and more for phone access to analysts, according to three people with knowledge of its pricing structure.
That’s the kind of expense investors may balk at paying. The introduction of MiFID-related fees means asset managers in Europe and the U.S. will cut more than $300 million in spending on external research, consulting firm Greenwich Associates estimated in a recent survey.
“MiFID 2 is supposed to level the playing field and help the smaller investors, but it’s having the opposite effect, because we can’t afford to pay as much as the larger firms,” said Mark Holman, chief executive officer at TwentyFour Asset Management LLP in London, which oversees about 5 billion pounds ($6.4 billion) of fixed-income assets.
Is it just us, or is it incredibly ironic that the firms tasked with valuing the most complicated corporate structures, asset backed securities, etc, can’t even value their own services?