The equity investment banking sector has adapted to many challenges over the years, including lower trading volumes, pressure on fees and technological advancement.
However, the ‘big bang’ generation appreciate that throughout their careers it’s been regulation that has had the greatest impact on their working lives.
This year is set to be an interesting one as we approach the implementation of Mifid II in 2018. Among other things, the directive will separate the payment for research from trading and execution commissions, stoking further pressure on revenue for the broking industry, as well as adding to asset management fees.
Brokers offering research to fund managers as an incentive for the execution of their orders will find this is considered an inducement to trade. But it is clear that most stakeholders are not prepared for the consequences of this part of Mifid II, have not even considered them, or perhaps have not even realised that they are a stakeholder.
If you thought Brexit was going to help by getting rid of painful European legislation, this directive is being driven even more so by the FCA than in Europe, so it’s probably here to stay.
Most listed companies, in particular small and medium caps, enjoy ‘free’ independent broker research coverage that highlights their attractions to professional investors, who provide the lion’s share of capital.
Brokers will have to stop distributing research to readers who don’t pay for it. Given the prices that brokers are thinking of charging for their research, a lot of potential investors could choose not to pay, perhaps opting instead to outsource investment decisions to well-run funds managed by firms doing their own in-house research.
What can investors do in the face of a dwindling and possibly exorbitant broker research market? Some information can be found via data feeds: these are rather sketchy at the small-cap end, but hopefully they will get better. It’s logical that many companies will pay for content to fill the knowledge gap, and maybe this isn’t a bad thing. It is just an extension of what many companies are already doing with PR, company reports and factsheets.
However, there will be a need for stock-specific, in-depth insight, especially for firms that have become reliant on free research but do not have the wherewithal to replicate this themselves.
This leads to the growing sponsored research market, firms writing equity research paid for by the issuer, very much like what happens in the debt market. Sponsored research firms offer an independent insight into investment companies, and give their material away free to the largest possible audience. Of course there are sceptics, but think about the degree of independence of other forms of information.
Brokers hardly ever write sell notes on existing or even potential clients, and some journalists may shy away from making negative comments on large advertisers. There is a strong case for establishing where the bias is: whether it is written by independent experts who like to be balanced and publish at more timely intervals to grow readership, and are likely to dig deeper and report on more than before.
