Larger Asset Managers should consider the potential economic benefit of relying more on internal research teams and assess which services should be brought in-house to resize and redefine the role of these teams.
In order to alleviate operational complexity, costs, and compliance risks, Asset Managers should consider applying to all their entities the approach defined to make entities within MiFID II’ scope compliant.
Notably, negotiating globally with research providers for overall usage across all locations will increase bargaining power and, therefore, reduce research costs.
FinTechs – Online Research Marketplaces
Numerous emerging FinTechs (such as Alphametry, Research Pool, Electronic Research Interchange, Visible Alpha, RSRCHXchange and Street Contxt) called research aggregators or ORMs (Online Research Marketplaces) give access to research reports and bespoke services from a wide range of partner providers in a single place (one-stop-shop) for institutional investors to cherry pick only what they want to buy.
These newcomers compete with incumbents in big data and research aggregation and distribution, such as Bloomberg, Factset, Thomson Reuters and S&P, which are all trying to improve their portals by introducing new functionalities similar to the FinTechs’ in order to stay in the game despite their higher prices.
To help streamline the process, ORMs have innovative user interfaces and offer features such as:
▪ Categorizing research, rating and ranking analysts on the basis of their recommendations’ historical performance,
▪ Interacting, following and rating favorite analysts,
▪ Using data analytics to make personalized suggestions and push relevant content. Putting the right content in front of the right people at the right time is a key optimization as it is estimated that between 70 and 95% of the content received is never opened,
▪ Flexible pricing model: it varies from subscription for unlimited access to pay-per-report/interaction and auctions (people bid on analyst reports).
Real procurement processes
To better manage research spending, the creation of a real research procurement function becomes necessary. Thus, industrialized processes must be implemented to optimize the needs and budgets definition, providers rationalization, negotiation and contracting, usage and quality monitoring, and invoicing and payments.
As it is the first time that actual prices are being set by research brokers — and that Asset Managers are paying a close look at research costs — agreeing on prices is far from obvious and negotiation can be harsh.
The key points for Asset Managers to lead these negotiations are:
▪ Have a dedicated team independent from the CIOs to negotiate with providers; CIOs could be too close to the matter,
▪ Keep in mind that the first-ever contractual price levels with brokers will be used as a baseline in subsequent years,
▪ Leverage volume, overall long-term relationships and competition amongst similar providers,
▪ Compare all offers on a cost per unit basis, and challenge providers by showing their positioning in comparison to their competition,
▪ Set target prices on the basis of budgeted usage as well as providers’ research quality ranking compared to competitors and their prices,
▪ Challenge the historical usage accuracy or amounts paid historically that providers’ proposals should be based on, as they can sometimes be widely inflated,
▪ Agree on committed budget amounts for a range of users or interactions to avoid having to renegotiate if the usage is greater than planned,
▪ Include a review clause in the contracts to avoid being locked in for their full length and having to pay the whole committed budget amount in case the quality is not satisfactory, or the usage is lower than anticipated,
▪ Agree on using a shared voting system to monitor usage and assess quality. Providers enter each service provided for users to rate; the results are then used to potentially review the contract’s terms.