A Look Behind the Curtain: Revenue Attribution in Equity Research


The following is a guest article by Mike Kronenberg, co-founder and CEO of Analyst Hub and Analyst Hub Securities, a compliance-driven research platform which has launched and partnered with twenty-three independent research firms.  

The way banks and brokers assign value to equity research has never made sense.

Categorizing clients based on the percentage of their order flow that is traded with the firm, the sell side encourages its clients to increase their trading volume with the promise of additional research and more robust corporate access.

The problem with this method is that the frequent fluctuation of trading commissions prohibits assigning a concrete monetary value to a firm’s research capabilities – valuing their analysts and corporate access as a changing percentage. Instead of the dynamic pricing that supply and demand set for most commodities, research and corporate access are used by the sell side primarily as a bargaining tool to encourage more trading rather than to establish it as the profit center it should be.

In addition, the very fact of research only being bundled with corporate access and sold alongside the 1,000-pound gorilla of trading services makes it impossible to establish its true value or attribute revenue to the product. The sell side is a buffet, offering a variety of services and content, and you’re obligated to buy it all, no matter which parts you want to consume.

Two recent events, however, have exposed the madness to this method: the advent of MiFID II and the arrival of the COVID-19 pandemic. Together, these earthquakes have the potential to rewrite the rules of research as they shine a light on the true costs and benefits to the buy side, and on why the old way of pricing things never made sense.

Analysts or Bargaining Chips?

Under the traditional scenario, analysts have become bargaining chips instead of being seen as the expert advisors – and profit centers – that they can be. As a cog in the machine at a sell-side firm, they are left to produce exorbitant amounts of research that may never see the light of day, and because they aren’t part of a direct transaction, they and their firms are left without an understanding of what their target audience is interested in and is willing to pay for. Analysts are meant to be decision influencers; they are close to the ground and have intimate knowledge of their covered companies, operating in virtually all sectors that the buy side needs to make informed decisions.

From the days of the Buttonwood Tree through to the age of the algorithm, investors have relied on sound intelligence to inform their decisions. But in the prevailing structure, with research demoted to an add-on to the real money maker of trading commissions, establishing a separate valuation for research is essentially impossible for the sell side. With their critical insights being devalued, analysts themselves have been left in the dark when assessing the value of their work.

Regulation to the Rescue?

While complaining about ever-changing regulations may be Wall Street’s unofficial national pastime, analysts are seeing an unintended consequence of new rules that really redounds to their benefit and provides a solution to the valuation dilemma. Thanks to the once-in-a-generation regulatory disruption of MiFID II, the buffet model is no longer sustainable, its requirements forever altering the mindset of the buy side and how it values external research. With MiFID II, the EU has placed restrictions on inducements that mean banks and brokerages are no longer be able to charge for research and transactions in a single bundle. By forcing a clearer sense of the costs of each of these disparate parts of the investment lifecycle, investors are better able to understand what they are paying for. Brokers have to provide more detailed reporting on their trades—50 more pieces of data, in fact— including price and volume information. Those who truly want to purchase research can see the value and direct their spending.

Two years in, this shift in revenue structure has had clear effects on the sell side and, in many cases, its analysts, as we’ve seen with shops like Macquarie and Deutsche Bank. But it also provides a never-before-seen opportunity for research professionals who are daring and nimble enough to take advantage.  

Paying Millions To Shake Hands

The second seismic event for valuing research has now arrived with the COVID-19 pandemic. While the virus’s human toll sadly continues to climb, around the globe we are just coming to terms with what the economic and financial meaning will ultimately be. At this early stage, however, the impact on one previous constant of the capital markets is beyond dispute: big sell-side conferences and in-person corporate access are off the table for the foreseeable future. With the big banks’ signature events not taking place, the playing field is considerably leveled for independent shops.

This represents a tremendous opportunity for anyone (with the right contacts and industry reputation) who can provide that access in an efficient yet effective way, and it suggests a roadmap for the post-pandemic world as well. What asset manager is going to pay millions for a handshake with a CEO when they’ve already been invited to a Zoom one-on-one, for a fraction of the cost?

Standing Up for Yourself and Knowing Your Worth

As you learn on the first day of business school, the price or value of a commodity or service is set by what the market is willing to pay. As analysts go into business for themselves, they are for the first time a part of the price discovery process. We see it every day at Analyst Hub, as our sales force blazes the trail for the analysts who have joined our independent platform. Unlike the traditional one-price-buys-all, buffet-style research, Analyst Hub’s independent research providers (IRPs) work in an a la carte fashion. They’re selling research for its own value, not as an add-on or enticement for trading services. This allows the buy side to purchase only what they need, keeping costs separate from trading and revealing the true monetary value of research. 

What does the process of figuring out a price really look like? Using our network and decades of sales experience, we work with the buy side to identify the appropriate subscription costs tailored to each analyst, allowing our IRPs to build successful businesses with as few as 20 subscribers and revenues in the millions.

With the challenges of COVID-19 top-of-mind, and the hindsight of living in a post-MiFID world, we can now see that the traditional model provides the buy side with research whose value can’t accurately be measured, while simultaneously underappreciating and undervaluing equity analysts. When research is sold separately, both analysts and the buy-side consumers become partners in a process that efficiently sources actionable intelligence, gets it to the right hands to make the right decisions, and makes the capital markets work the way they were intended to work from the very beginning.


About Author

Mike is the Co-Founder and CEO of Analyst Hub and Analyst Hub Securities, a compliance driven research platform that he founded to help high quality sell side research talent own their own enterprise. Mike has 18+ years of Institutional Equity Sales experience, most recently as a Managing Director at Sanford C. Bernstein. Mike started his career in the Global Training Program at Deutsche Bank Alex.Brown and also spent 10 years at Raymond James & Associates. Mike earned a Bachelor of Science with a double major in Finance and Accounting from Miami University in Oxford, Ohio.

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