Capital Markets | Investment Banking
Rethinking The
Research Function
2
Services
Wanted – Sell
Side Financial
Analysis
Sell-side research services
related to our on-going need
for input within the global
financial markets wanted.
We seek professionals who are
considered among the most well respected
analytical leaders in their chosen field of
expertise. The right candidate will have a
proven track record of Alpha generating
ideas, insightful information flows,
outstanding publishing and speaking
skills, be available to service our needs on
a moment’s notice, and provide access to
industry managements and participants
through conference calls, one-on-one
meetings, field trips, and conferences
where the cost is borne by the sell-side
provider. The position will also require
members of your team to service our firm
by offering sales, service and support
as well as trading services guaranteeing
best execution and access to capital and
your firm’s balance sheet as needed.
In return we offer to engage
your services for payment terms
to be decided at a later date of our
choosing, if at all, based on overall
perceived service provided to our
firm relative to your peers.
Please note: We expect services to be
rendered for free for a period of no less
than six months before consideration
can be made for payment – there
will be no recourse for payments the
recipient deems unsatisfactory.
Qualified candidates should contact our
Broker Liaison, Mary Smith, at 212 555
1000 or email [email protected]
Sadly this is the state of the sell-side research
model as viewed from both the financial
buyers’ and providers’ points of view. Of course
this does not take into account the entire
business case for providing research, namely
doing so as a means of supporting other
capital markets functions deemed profitable
such as IPO fees, prime brokerage, asset and
wealth management and trading. Research
has always been part of the capital markets
value chain and is not likely to disappear.
However, the current ill-dynamic between
the buy- and sell-side in terms of research
service and delivery needs to be addressed.
In an environment where equities margins
have been squeezed to near zero and FICC
trading could be facing the potential for
a similar fate in the longer term, driving
value through research should evolve in
today’s digital market place in order to
not only remain relevant, but also - once
again - become profitable rather than a “loss
leader”. To this end there are a number of
alternatives that need to be explored in the
context of helping create a possible optimal
business model. These include embracing
digital disruption as a potential competitive
differentiator as investors continue to
consume ever larger volumes of information
from digital sources. It also includes the
expansion of digital delivery methods, both
as an efficient delivery mechanism but also
for access control and the potential to better
understand consumption for monetization
and price discovery. Finally, investment
banks have unprecedented amounts of both
historical and real-time data which might not
be adequately leveraged through advances
such as real time data stream analysis,
layered analytics, and big data applications
for discovering new data correlations to
asset prices. The question is: how did we get
here and what can be done about changing
the business model of research services?
To answer these questions,
we first must examine the
evolution of sell-side research.
From the sell-side perspective
Research services provided to the buy-side
were given away for free, both in written form
and as a service (i.e. information flow and
advisory), in return for what was hoped to be
commission flow and IPO underwriting fees at
a later date. Imagine taking items and telling
the grocer, “I will decide how much utility I
gain from your products after consumption
and will come back to pay you what I believe
is fair later.” While this business model seems
counterintuitive, the reality is historically
trading and IPO margins more than made up
for this fundamentally flawed business model.
From the buy-side perspective
The expectation was that investment banks
would provide research (advisory) services
to help clients better understand the
fundamentals of the businesses in which they
invest as part of a larger bundle of services
which also included trading (brokerage), IPO
allocations (new deals), and sales support.
Payment for these services is on the “back
end” typically through a “vote” process
which decides how much business will be
directed to each broker. One of the key issues
to understand is the fact that the dollars
being paid to the brokers comes out of the
investors’ pockets in the form of trading
commissions tacked on to the price of a
security, NOT the management fee(s) paid
to the money manager. In addition, buy-side
managers are in part incentivized to pay more
commission to those brokers with the best
equity IPO’s or FICC issues since allocations of
said securities are at least in part determined
by client ranking (i.e. how much the client
pays the broker) at the investment bank.
In the past, research was subsidized by
investment banking fees. According to a
study by Sanford C. Bernstein in 2004,
the annual research budgets at the top
eight investment banks averaged between
$200 and $300 million during the
2000–2003 period1, of which 40% was
covered through investment bank fees.
3
The Paradigm Shifts
After the internet bubble and the subsequent
financial crisis, the capital markets have
realized a number of negative fundamental
shifts that have altered the profitability
paradigm related to providing research
services. Research analysts are prohibited,
in large part, from the IPO process. Chinese
Wall regulations have been created to remove
analysts from information flow generated
by bankers, and Regulation Fair Disclosure
means companies are not permitted to disclose
any information deemed material to their
business unless it has already been publicly
disseminated. This takes away a key “edge” of
street analysts who in the past had access to
information unavailable to the general public.
Electronic trading and alternative trading
services have helped drive trading margins
in equities to near zero. As the figure below
shows, equity commission rates remain under
significant pressure and, in the longer term,
the FICC will likely suffer the same fate,
although at a slower rate of decline. Against
this backdrop, freely available information
has grown exponentially due to the internet,
as well as the ability to target and analyze
relevant data streams. Hence, the ability to
gain an information “edge” and to rise above
the “noise” is immensely more difficult.
This is also compromising
research quality as:
• The amount of research expected from an
analyst is growing due to cost constraints
(i.e. covering a greater number of securities).
• Given the economics of the business, the
best and brightest are no longer attracted.
As one portfolio manager of a multi-billion
dollar fund put it, “the average age and
experience of sell-side analysts goes down
every year. They are getting younger and
younger without any real, long-term industry
experience or insight.” Of course this trend
will also persist until such time as research
once again becomes profitable and viewed
as a viable long-term career option.
Commision Rates for U.S. Equity Trades
Cents-per-share
4.5
4.00
4.0
3.5
3.20
4.00
4.00
3.80
3.70
3.70
2.76
3.53
3.58
2.69
2.63
2.69
1.20
1.16
1.07
2012
2013
Q1 2014
3.21
2.90
3.0
2.72
2.5
2.0
1.30
1.5
1.0
0.5
0.0
Q1 2007
2008
Normal “high-tough” agency-bundled trades
Note
Source
4
2009
2010
2011
Average “all-in” blended comission rate
Algorithmic/smart-order routing trades
Based on responses from 271 traders in Q1 2007, 272 in 2008, 290 in 2009, 286 in 2010, 304 in 2011, 316 in 2012, 294 in 2013, and 316 in Q1 2014.
Net of rebates and excludes portfolio and electronic trade. All-in blended rate across single-stock, program, and electronic trades, including any commission
management program “tack-on” rate. Excludes any “tack-on” rate to pay for research.
Greenwich Associates 2014 U.S. Equity Investors Study
The Paradigm Begins to Shift For The Buy-Side
As alluded to earlier, research unbundling
in the United Kingdom as mandated by
Mifid II to encourage the creation of a hard
dollar research market and perhaps in other
jurisdictions may alter the economics of asset
managers’ business models. This is due to
firms being forced to pay for research services
from their own profit and loss, rather than
costs being tied to the price of securities and
therefore paid by investors. The alternative
under Mifid II is money managers receiving
agreement from investors to fund a research
budget, but we doubt this will be much of a
factor given cost and complexity. However,
these regulations will have significant
impacts, both intended and otherwise.
The creation of real price discovery for
research is likely to force money managers to
scrutinize the research services they purchase.
This will lead to more selective consumption
and hence a flight to quality, which will
negatively impact the “me too” research
providers. This regulatory mandate may be
further exacerbated by the fact that managers
face their own margin pressures. Long term
underperformance of active managers has
given rise to unprecedented growth in ETFs
and other passive or Index products. Relative
underperformance also drives managers to
transact with a decreasing number of brokers
in an attempt to get more leverage from
commission dollars paid to their sell-side
providers. However, the one thing that will
not change is that money managers may
continue to see value in access to unique
insights and information, access to capital,
and access to deals (IPO’s and primary issues).
more difficult. This could be exacerbated
by the amount of free and easily obtained
information publicly available that was
once the domain of the analyst community
due to the time and effort involved. Finally,
there is currently too much research supply
for liquid securities. This is not to say that
quality research cannot be adequately
monetized as highlighted by examples such
as Autonomous Research, an independent
provider which has proven successful as
noted recently by eFinancialNews.com.2
Finally, as buy-side firms have built their
own research capabilities (especially at the
larger hedge and mutual funds), coupled
with increased regulatory pressures from
compliance and Regulation Fair Disclosure,
the ability to generate alpha from sellside research will continue to become
So What Do They Pay for?
Interestingly, slightly more than half of buyside professionals choose their investment
banking relationship based on research, yet
65% also cite price as a determining factor.
However, among buy side institutions, over half
either don’t use a service or expect research
to be delivered as part of the service bundle.
Risk management, best execution, and ability
to trade rapidly are cited as service priorities.
In other words, there is an economic
disconnect between the research function
and revenue. On the one hand, research
is cited as an important factor for
choosing firms with whom to transact.
Yet on the other, it is a service viewed
as not requiring paying a premium.
Of course these trends have caused investment
banks to explore ways of cutting costs. One
strategy has been around outsourcing research
functions to low-cost offshore providers.
However this strategy has limitations due
to proximity and the deep tacit knowledge
required of a research analyst to adequately
cover a particular industry. It also presents
challenges related to analyst availability for
customer service and compliance.3 Clients
may still believe original research is what
they are paying for and any move seen as
degrading the process, either due to location
or perceived quality, will be met with
negative results. Despite these challenges,
outsourcing/offshoring of the research
function remains a cost effective, viable
alternative and should be considered not
simply based on cost but rather holistically
relative to quality and effective client delivery.
Despite numerous efforts, both on- and offshore, compensation costs for research have
moderated in recent years, but still remain
high. For example, an Accenture-sponsored
survey revealed the average compensation
for research professionals among top-tier
investment banks decreased by 8.16%, and
headcount by 2.5%, for the 2010-2012
period alone. In terms of geographies,
65% of spending was related to North
America, Europe, and Asia. Interestingly,
on an average comp basis, North America
consistently has one of the higher average
salaries across all banks while Australia and
Latin America were also “expensive” regions
ranging from ~1.0x the average to as much
as 1.44x the average between 2010-2012.
5
What are the four most important factors influencing your choice of
an investment bank for a product or service?
Clients rated price and research provided as the most
critical factors for choosing an investment bank
Price
68%
Research provided
58%
Ability to tailor appropriate financial options
48%
Trading/execution capabilities
42%
Willingness to finance
30%
Lack of any conflicts of interest
26%
Existing relationship with individuals/bank
26%
24%
Deal execution abilities
Market expertise/knowledge of product or service
22%
Market reputation for this sort of deal
22%
16%
Wide range of service offerings (one stop shop)
Expertise in a designated region
14%
Least important were a wide range of service offerings
and geographical expertise
Source
Base
YouGov, Accenture Research
50 Asset or Fund Managers, US and UK 24/07/13 - 16/08/13
Fund management clients prioritized risk management services and trading execution capabilities over all other services
32%
Risk management services
Ability to trade rapidly
28%
Ability to trade at best price
28%
Trading advice – when to trade
Post trade analytics
10%
Ability to execute complex trades
8%
Liquidity management
6%
Assistance with meeting regulatory compliance issues
6%
Access to written research
6%
Source
Base
6
40%
10%
14%
56%
2%
34%
56%
38%
Top 5
most important
demands
10%
48%
Will pay a small premium for better service
YouGov, Accenture Research
50 Asset or Fund Managers, US and UK 24/07/13 - 16/08/13
34%
34%
40%
2%
30%
36%
28%
0%
28%
40%
16%
2%
26%
44%
20%
Access to senior corporate executives of the
companies that research covers
Will pay a large premium for better service Value differentiating service
40%
4%
34%
46%
46%
Top 5
least important
demands
8%
10%
Expect as basic service
Not a service we use
Outlook: Opportunities Still Exist
As of 1Q 2014 the total commission pool
from asset managers showed the first signs
of a turnaround in five years. According to
Greenwich Associates, buy-side traders predict
the U.S. cash equity commission pool will
increase 4% on average by year-end 2014 to
an estimated $10.75 billion, with hedge funds
(9% projected increase) more positive than
long-only funds (3% projected increase). The
expected increase is being driven by what
appears to be growing demand for overall
content. In fact 80% of the commission
wallet increase came from spending on
research and other related services; written
research, corporate access, market color and
analytics. In other words providing insight
into where their orders are going and where
their executions are ultimately coming from.
U.S. Cash Equity Comissions -- The Total Wallet
Annual Spend into Q1 2014 (in billions)
14
13.90
12.60
11.30
12
13.20
12.20
11.20
10.80
10.90
11.60
10.30
10.90
10.34
10.75
9.30
10
7.80
8
6.55
6
6.05
4
6.70
5.75
5.60
5.51
5.70
5.54
5.60
5.29
5.20
7.00
9.52
6.80
6.20
5.30
5.00
6.10
5.50
5.39
6.20
6.20
4.80
4.70
3.91
4.14
2
0
Q1 2002
2004
2006
2008
2010
2012
2014
Expected
Q1 2015
Total Commissions
Equity Research or Advisory Services, Sales Coverage and Corporate Access
Expected
Sales Trading and Agency Execution
Source
Greenwich Associates: Demand for Research Drives Uptick In Commission Spend
Proportion of U.S. Equity Research/Advisory Allocation for Research, Sales & Corporate Access
24%
23%
Analyst service
19%
Direct access to companies’ management
11%
12%
13%
10%
9%
10%
Sales service
Individual company or industry studies
Thematic investment ideas or specific stock recommendations
7%
Economic analysis and portfolio strategy advice
7%
7%
7%
Other, including global research
Customized or bespoke research
Note
Source
22%
22%
14%
13%
13%
Research conferences and industry seminars
Expert networks
26%
2%
NA
1%
8%
8%
3%
3%
2%
1%
1%
1%
Based on random sample of 148 accounts. Direct corporate access includes non-deal roadshows, one-on-one company meetings and conference call needs.
Greenwich Associates: Demand for Research Drives Uptick In Commission Spend
Q1 2014
Q1 2013
Q1 2012
7
Redefining Sell-Side Research
From all this data, Accenture concludes that sell-side research
will remain a key differentiated service offering, but it needs
to be redefined. Sell-side institutions need to view research as
an integral part of the service offering so as to help optimize
revenues across the entire enterprise. Sell-side institutions
have access to a vast amount of industry expertise and data
and need to rethink how to leverage those factors for optimal
monetization. The question is: How to earn money with
research? Market positioning, content, and delivery methods
all need to be considered as pieces of the total offerings
for revenue and market share maximization. Accenture
believes sell-side firms should consider the following:
8
Creating the Optimal Business Model
Firms can choose to be a global, one-stop
shopping flow monster offering full service
across asset classes, with research being
a supporting function for the enterprise.
Another alternative firms have is to be a
boutique or regional firm viewed as having
a particular expertise with differentiated
views of particular industries or strategies,
such as Telsey Advisory Group, Autonomous
Research, Arete, or Capital Economics. While it
may seem obvious, the choice has significant
implications for efficient research access,
delivery, which research is commoditized
versus value-add, and then framing the
operating model, compensation structure, and
workforce accordingly. Clients will expect the
former to have research depth and expertise
for all industries and asset classes, implying
significant costs which may not be justified on
a stand-alone basis. On the other hand, banks
may need to consider the potential synergies
created by cross-industry and cross-border
coverage that could be otherwise lost. The
latter boutique strategy suggests research
expertise related to a narrower industry subset,
meaning some revenue opportunities may be
lost, but the cost/benefit analysis lends itself
to being more easily justified. The answer may
drive business decisions for building delivery
functions that range from simple electronic
(i.e. email) delivery and communications to
vastly more complicated, and hence costly,
solutions such as interactive portals.
Digital Disruption Cuts Both Ways
As the traditional research function continues
to suffer from digital disruption, so too can
it potentially benefit by being more digital.
Investors still use traditional sources of
information to make their decisions (e.g.
analyst research reports, direct information
from companies, and primary research) with
their reliance on digital media still being
very low despite the growing significance.
Blogs, social networks, micro-blogging
services and message boards are becoming
more important, with 86% of investors
recognizing their importance and seeing
them as having an increasing impact on their
investment decisions.4 This is likely a function
of the digital generation (Gen D) population
becoming a larger and larger proportion of
the workforce, at least partially.5 Not only
is the consumption of digital information
increasing, contributions in the form of
conversations, posts, etc. are on the rise and
having a big impact. Technology allowing
for layered analytics, learning which digital
contributions are deemed important and
credible, and incorporating new data sources,
can create customized research offerings
based on client directed interests/management
styles and demand. Combining attractive data
visualization and “live” updates and trading
ideas can create a truly interactive customer
experience. With advanced data analytics
being deployed across the entire suite of
research products to leverage multiple research
sources, a more holistic view with real time
updates could imply better client alignment,
but also the need for big data applications. For
example, data visualization tools leveraging
research inputs from across the enterprise
bring a layer to analytics that allow for
better and faster trading decisions based on
real-time data and current events driving
market share. But doing so requires significant
computing power, secure storage capacity,
and real-time digital delivery methodologies.
An interesting recent example in the use of
digital technology is UBS leveraging analyst
popularity ratings and fluctuating demand
for services. By analyzing consumption and
usage data, the bank is creating a model
where, based on these rankings, investors
pay for research services that could be four
to five times higher for the most popular
analysts versus their peers. Of course,
setting an “auction” marketplace for analyst
resources will not be without controversy, but
the UBS model could show that leveraging
data capture from digital such as feedback
loops or scores can create better business
models versus today’s research delivery.6
The key question for the future of research
services remains: How to have a cost efficient
research access and to deliver distinctive value?
Digital Delivery
interactive interfaces as a competitive
differentiator. This could also be used for
post-delivery analytics to better understand
consumption patterns and client usage for
better research resource optimization.
Another opportunity created through better
digital delivery methods will be information
flow control and consumption tracking. Many
of the current delivery methods employed
by the sell-side have little or no access or
sharing controls. Once a report or data is
transmitted to clients, it can be downloaded,
saved, and shared by anyone willing to pass
the information to others. By more tightly
integrating document and data controls,
sell-side firms can better limit the number of
people who view their proprietary research
information, which in turn may increase
its perceived value. Again, we point to
Autonomous Research as an example of a
firm that very tightly controls the number of
investors with access to its data, which in turn
could create pricing power through exclusivity.
How to Monetize Research Data?
Finally, sell-side firms have vast amounts
of historical and real-time market data, as
well as other data streams. Data applications
including massive amounts of news, blogs,
and other editorial and media content data
from anywhere around the world can be
quickly integrated into research reports.
Also, new data sources, such as social media
provide additional insight such as derived
sentiments (based on sentiment analysis)
from customer messages on Twitter to
“following” localized data and subject matter
expert inputs (e.g. determining crop yield
based on localized weather and tweets from
farmers). Applying advanced analytics to
better understand how certain events impact
or don’t impact asset prices creates an
opportunity for trading idea recommendations
which in turn could drive revenue.
Not nearly enough is being done to create
holistic, full service, interactive digital delivery
platforms. While many claim to have “the
solution”, most are simply repackaged versions
of the old built for purpose silos or binary
asset class products rather than creating
an opportunity to interact for collaborative
engagement. What the buy-side wants is
the right information at the right time for
global ideas with a local presence. One of the
challenges for digital delivery, however, will
be competition and rising above the noise by
creating mobile, buy-side regulatory compliant
9
How Accenture Can Help
Accenture can help to assess the research value creation process,
suggest ways to optimize the operating model towards an
efficient research function and can help ensure that relevant
regulatory requirements are met. Accenture has strong analytics
and technology capabilities and can advise on ways of leveraging
data visualization and digital delivery optimization methods.
Analytics:
Separate the insights and meaningful
information from the vast amount of data
noise. Analytics can also automate, streamline
and pre-populate a lot of the manually
intensive and “boring” parts of research
report creation removing the need for some
low-skilled analyst input, even if low-cost.
Consider just a few of the opportunities:
• To separate the “noise” from the “insights”
for research, advanced analytics algorithms
allow for better filtering of news,
blogs and other research based on the
relevance and credibility of the source.
• Leverage Natural Language Processing
and text analytics to quickly distill
the most important parts of articles
and news releases using sentiment
analysis to quickly determine potential
shifts in investor perceptions.
• Analytics techniques, such as pattern
recognition, anomaly detection and
utilization of new data discovery and
data visualization tools may uncover new
insights, such as determining connections
and correlations between various stocks
or industries that may have not been
viewed historically as interdependent.
10
• Machine learning algorithms can
“learn” and speed up and enhance
the process of deriving the most
useful and unique “insights”.
• With the emergence of new analytical
tools and techniques, the research analysts
that used to have a generalist or business
background working in XLS, would now
become a data scientists working in
R, SAS or other new environments.
Technology:
Internal and external cloud infrastructure
combined with Big Data technology platforms
can allow for having a single platform
for sharing research between research
teams creating a holistic (global) research
perspective. At the same time new Big Data
technologies and real-time capabilities can
improve the speed with how news and data is
quickly processed and released to the investors.
11
Notes
Contacts
About Accenture
1https://warrington.ufl.edu/graduate/
academics/msf/docs/speakers/prereading_
McMahon_Ward0405FortuneMag.pdf
Owen Jelf
Managing Director,
Accenture Global Capital Markets
[email protected]
Sigrid Seibold
Managing Director,
Accenture Capital Markets Digital
[email protected]
Accenture is a global management consulting,
technology services and outsourcing company,
with more than 336,000 people serving
clients in more than 120 countries. Combining
unparalleled experience, comprehensive
capabilities across all industries and
business functions, and extensive research
on the world’s most successful companies,
Accenture collaborates with clients to
help them become high-performance
businesses and governments. The company
generated net revenues of US$30.0 billion
for the fiscal year ended Aug. 31, 2014.
Its home page is www.accenture.com.
Chris Brodersen
Manager, Accenture Research
[email protected]
Learn more about Accenture
Capital Markets at:
2http://www.efinancialnews.com/
story/2015-02-11/autonomous-researchthe-house-that-puts-a-price-on-exclusivity
3https://www.deepdyve.com/lp/elsevier/whenoutsourcing-is-not-an-option-internationalrelocation-of-hDTDNHmvo1/17
4http://www.prnewswire.com/news-releases/
brunswick-group-releases-survey-oninvestment-community-use-of-digitaland-social-media-188681861.html
5https://www.accenture.com/us-en/
insight-generation-d-europe-investorsurvey-wealth-management
6http://www.wsj.com/articles/new-rulespoised-to-reshape-analyst-research-sector1423514292?KEYWORDS=ubs+analyst
Bob Gach
Managing Director,
Accenture Capital Markets Strategy
[email protected]
www.accenture.com/trading
www.accenture.com/investmentbankingblog
@AccentureCapMkt
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