The following is the first of a three-part Q&A with Barry Hurewitz, Managing Director and COO of UBS Investment Research Division. Hurewitz was recruited from Morgan Stanley to UBS in 2013 after being research COO at Morgan Stanley for 13 years, along with Juan Luis Perez who became UBS’s global head of research. UBS was recently named the top global equity research firm by Institutional Investor.
Hurewitz was instrumental at Morgan Stanley in implementing innovations such as Morgan Stanley’s primary research and alternative data capability, AlphaWise, and in pioneering more robust metrics around research pricing and profitability. We conducted previous interviews with him in 2015 which can be found here and here.
SB: Who do you see as the winners and losers from the research unbundling provisions under MiFID II?
BH: It’s way too early to tell. Whenever there’s a disruption in an industry — and this is a pretty big disruption — the way things unfold is never the way the experts opine in the very beginning. I think it’s going to be 36 months before we see the new equilibrium. The best way to approach these things is to be prepared for all different scenarios, stay composed as best you can and watch how things unfold.
When you look at the drivers of the research business there has to be a commitment to quality. You have to think deeply about how you deliver value, how you fit into your client investment processes and focus on that. If you can’t advance clients’ thinking in a distinctive way, then you’re not going to be that necessary. If you’re important to your clients’ investment process, you’re more than likely going to be one of the winners.
I think the firms that are cutting early will not end up in the best position. It’s a mistake to make assumptions based on early feedback or reacting to the news or listening to the common narrative.
SB: How do you see waterfront coverage evolving as clients adopt a more granular focus on what they consider most relevant for them and may not see a specific need for all the capabilities that a firm like UBS offers?
BH: Many of the bulge bracket firms have a client base that is broader than just institutional equity investors. There are also food chain-related factors. Small boutiques may not care about certain sub-industries. But we want to take full advantage of being a global platform by making connections across the food chain. We derive a lot of value for our clients when we assess global competition and global ecosystems.
We cover around 3,000 stocks and we’re not even the biggest – some firms cover even more. If you ask a client do they want us to cover more or less, they may not even know because what matters to them can change over time. An investor focused on the retail sector may not care about Internet stocks but all of a sudden Whole Foods is acquired by Amazon and now they need to talk to our Internet analyst. Or you see that one the largest suppliers to the Chevy Bolt is a company in Korea so now you want to talk to our Korean electronics analyst.
I think virtually all of our clients see a need for somebody that has high quality consistently around the world on issues that affect their core companies because of the ecosystems and the global nature of businesses.
SB: One of the topics we’ve been paying a lot of attention to relates to the valuation of investment research. What’s your view on where research pricing should be headed?
BH: I would tie this back to your first question about winners and losers: I think it’s way too early to tell. I think a lot of firms are holding off and waiting to see what others will do. We’re now approaching December and we still don’t have the majority of our accounts done yet. But the ones we have completed have gone well.
So far — and I don’t know if this is just UBS’s experience — negotiations are going fine on the equity side. We’re actually somewhat pleasantly surprised by how the negotiations are going. There are a lot of clients who want to make sure that their investment process is not disrupted and they want to make sure they secure access to high-quality research.
Analogies to the music industry
When you talk about pricing, I would look at the music industry for an interesting analogy. When the Internet really took off, that was the peak of recorded music sales. Napster came out and then recorded music sales dropped off. The conventional wisdom is that the music industry has not done very well since.
But there’s more to the story. iTunes emerged and then Spotify and then Pandora and then Google and there’s never been more recorded music sold than today. We’re at an all-time high. Now the part that’s not lost on people is that the revenues for recorded music are down 80 percent from the peak. And so people point to the death of the music industry.
However, the music industry isn’t dead. But instead of using a music concert to promote the record, now they’re using recorded music sales to promote the concerts. The business model has morphed from one that depended on the reproduction of music to one that’s much more about a live experience.
You can look to other industries the same way. In broadcast TV, because of Hulu, Netflix and Amazon the whole industry is moving from an advertising business to a new business model where people are actually doing pay per view.
In the research industry right now people are starting with the historical model and trying to figure out prices based on the way that it’s been done before. Over the next decade, you’re going to see a lot of experimentation and changes in the payment models. And the business models will evolve.
The next installment [subscription required] will continue the discussion of research pricing.