For years, investment banks have been giving away a product for free simply in the hopes of attracting future trading commissions. What product, you ask? Sell-side research.
What began as a way to demonstrate thought leadership and woo prospective clients has largely become a highly commoditized endeavor. Aside from the unique insights provided by niche boutique with specialized expertise, non-differentiated research is likely not what the buy side wants or needs. We took a closer look at this emerging challenge in our latest Top 10 Challenges for Investment Banks series. Here’s what we found.
Three factors that are shaping the sell-side research landscape
Declining funding: Thanks to the rise of electronic trading and alternative trading services, equity trading margins are shrinking. Greenwich Associates found that commission rates for electronic Commission Management Program trades averaged just 1.07 cents per share in the first quarter of 2014. Even for high-touch, agency-bundled equity trades, that figure was only 3.58 cents per share.
New competition: Information that was once only accessible by sell-side analysts is now readily available to the general public online. New players with significantly lower cost structures are entering the research space, making it more difficult than ever for investment banks to gain an edge and rise above the noise.
Increased regulation: In January 2018, the Markets in Financial Instruments Directive II (MiFID II) will separate broking, or trading, from research fees. A recent report by Benjamin Quinlan, former head of strategy for Deutsche Bank’s equities business in Asia Pacific and investment bank in Greater China, predicts that research budgets could shrink by as much as 30 percent, or $15 billion, in response.
Three ways that digital technologies can help
Despite these challenges, sell-side research remains an important part of the investment banking business model. Money managers are still willing to pay for research, but budgets are smaller than they have been in the past. Digital technologies can offer a way for firms to get their research functions back on track and make their research competitive and profitable once again. Here’s how:
Fintech: Everyone’s chasing alpha—and financial technology (fintech) start-ups are no exception. But instead of being overwhelmed by big data, many are taking niche positions trying to find “alpha gold.” As an investment bank, you could view these fintechs as competitors or—if you can’t beat ’em, join ’em—as potential partners.
Social platforms: As the digital generation becomes an increasingly important part of the workforce, the importance of blogs, social networks and message boards continues to grow. According to a recent Brunswick Group survey, 86 percent of investors recognize the importance of these platforms and see them having a growing impact on their investment decisions. As digital consumption and contributions increase, analytics and artificial intelligence capabilities could make it possible for firms to create and deliver customized research offerings.
Digital delivery: The buy side wants the right information at the right time. Firms that can deliver that in a full-service, fully interactive, mobile digital platform will likely lead the pack.
Sell-side research is entering into a new and uncertain landscape. Exploring your digital options now may be critical for setting your firm apart from competitors and establishing a profitable path in the future. If you’re interested in discussing your organization’s next steps, you can get in touch with me directly at email@example.com.
In the meantime, check out the full report: Challenge 9: Rethinking the Research Function