The challenges of how to manage research under MiFID II – where it comes from, how you pay for it and how much it costs – are the result of the regulation’s focus on bringing transparency to investors. The regulation has also created a cottage industry of nimble innovators alongside the big players that have created solutions aimed at addressing the challenges.
Many of the innovators offer aggregated research platforms that assign a specific value to each product, making their services MiFID II compliant while still enabling fast and effective distribution. But there is a new breed of provider springing up that is looking to take things a step further.
Visible Alpha, for example, a US-based investment research technology firm founded in 2012, offers a suite of buy-side and sell-side solutions that are transforming the way research services such as reports, analyst models and corporate access events are distributed, consumed and evaluated.
“Equally as important as helping the buy side find and consume research – we’re providing them with the tools to accurately value it,” explained CEO Scott Rosen. “What reports did they purchase, who read them, what analysts did they speak to, how often and for how long? Clients can then assign proprietary scores or grades to each. It covers the entire research spectrum, and it helps the buy-side to monitor and measure, both quantitatively and qualitatively, all of their sell-side interactions.”
Beyond this, in early 2017 the company introduced a new level of transparency in investment research with the launch of Visible Alpha Insights. Insights, aggregates analyst spreadsheet models from major banks to provide deep comparable and consensus views across hundreds of line items, such as unit sales, pricing and margins for individual products and key financial, divisional and operational metrics for each company.
“The value of a 30-page research report is in decline,” said Rosen. “In its place, these aggregated consensus numbers are distilling the intelligence behind the reports in a consumable way, providing a level of detail and insight that is unavailable anywhere else.”
In the past, analysts would have been far more reluctant to share their proprietary data models – but in this increasingly competitive climate and with so much information out there, the pressure is on for them to prove that their forecasts are robust – enabling firms like Visible Alpha to leverage this new trend for transparency in order to create a brand new method of processing and presenting research data.
Nucleus 195 is another firm innovating in the research aggregation space, with a fully MiFID II compatible platform set to launch in mid-2018. It aims to bridge the gap between local research and investment managers, improving on current inefficiencies and allowing research to be exchanged at a fair price. The platform will provide advanced search functions, notation and share capabilities, real-time analyst comments and supported communication between research providers and investors, while full transparency allows for efficient research budget management. The solution focuses on local research providers, linking on the ground contacts to offer a truly global scope, and focuses on emerging and frontier markets as well as developed markets, giving the platform an interesting edge.
The platform comes with an integrated compliance module that allows clients to manage research workflows effectively while providing an easily identifiable audit trail. Sales management tools show providers how the investment management community is interacting with their research, while end users are offered a broad suite of tools to manage research budgets and upload third-party content from other systems.
Development started in November 2017, and the firm has worked hand in hand with content providers and investment managers to build a suite of products based on specific needs. Launch is planned in late July or early August. Co-founder Doug Rivelli, formerly at Fidelity and Goldman Sachs, says: “We don’t view ourselves as an aggregator, we have built an end-to-end research ecosystem, with a suite of tools that can be used individually or as a total turnkey solution for the entire lifecycle of the investment research process. We focus on a really broad, diverse research universe, and because our system is so flexible, we can adjust permissions accordingly based on region-specific regulations.”
While firms such as Visible Alpha and Nucleus 195 are focusing on the effective distribution of high quality content, others are exploring the challenges of how to manage, track and administer that content, especially in terms of the quantifiable value it provides.
Commcise is a UK-based firm that helps its clients understand the cost and value of their sell-side relationships, providing cloud-based commission management, research evaluation and accounting solutions to combine research funding, consumption and reporting into a single integrated platform.
The system is available in three forms, tailored specifically to the requirements of investment managers, brokers and research providers. On the buy-side, Commcise enables investment managers to transform their processes around funding and valuing research services by providing a single integrated platform that supports budgeting, funding commission reconciliation, invoice and contract management, consumption tracking, research evaluation, payments, reporting, and accounting.
On the sell-side, the integrated commission management, service pricing and client pro?tability software allows providers to integrate all their buy-side clients to be managed on a single platform. For brokers, Commcise acts as a MiFID II compliant link between investment managers and research providers, and helps to automatically manage and reconcile commission sharing agreements across their client base to ensure no cross-contamination between funds.
Paul Charie, global head of sales at Commcise, says: “We do not distribute research, there are plenty of other people that can do that. We manage the process, track it, administer it and provide organisational support on both sides of the picture.” MiFID II has substantially boosted the need for services like these – and Commcise is seeing business soar following implementation. For example, MiFID II’s ex-ante and ex-post reporting requirements mean that asset managers now have to forecast what each fund will contribute to research costs, and then reconcile that with what was actually used and charged at the end of each year. “That takes a lot of granular analysis,” points out Charie. “But because we have an automated system, we can pull it all out at the touch of a button.”
Of course, in the run-up to MiFID II there was a frantic rush as everyone scrambled to put their systems into place, and since January most firms have seen the market quieten down. But that does not mean demand has lapsed. As financial markets settle down into the new normal and fire drills become less frequent, activity is likely to creep back up.
Transparent research provision and payment might be a requirement of MiFID II, but it is also a business imperative to ensure the best use of funds. With these new solutions now emerging to accurately quantify that value, buy-side users should be able to go back to the table in a stronger position to renegotiate their research purchase decisions – and this is likely to drive further development in the sector.
“We are seeing an uptick of interest again, as people look at working with reality rather than theory, and looking at where they need to spend their money to ensure that the systems and infrastructure are appropriate,” concludes Charie. “So there is a gentle move upwards and we fully expect this to increase through the second half of 2018.”