Autonomous Research, a UK-based independent research firm, reported that its UK business surged in the fiscal year ending March 31st to exceed £25 million for the first time. Unfortunately, some recent developments could pose future problems for Autonomous and other successful independent research firms.
2014 Financial Results
Founded in 2009 by former Merrill Lynch bank analyst Stuart Graham, Autonomous Research reported that the revenue for its UK research business rose 19.7% to £25.6 million (approximately $43 million) in the period ended March 31st, 2014 from £21.4 mln in the prior year.
Administrative expenses rose 26.5% from £7.1 mln to £9.0 mln in the most recent twelve month period. Consequently, the firm’s operating profit reportedly rose 15.5% to £16.5 mln ($27.7 mln) from £14.3 mln during the same period.
These results do not include the performance of Autonomous’ rather significant US business which currently employs almost two dozen staff.
Growth in Trading
Besides the robust growth seen at the firm in 2014, another interesting insight seen in Autonomous’ recent financial report is that the way buy-side clients are paying for their research is shifting.
For example, in 2013 47% of the firm’s business was paid for using CSA’s, 37% of revenue came in the form of direct equity trading, and 13% came from direct fixed-income (credit) trading. However, in 2014 the percent of clients paying for Autonomous’ research with CSA’s fell to 40%, the percentage paying by executing equity trades with the firm stayed unchanged at 37%, and the percentage paying for the firm’s research by trading with them in fixed-income securities surged to 22%.
Clearly, in 2014 Autonomous’ customers were more interested in paying for their research by trading directly with the firm rather than directing other brokers to pay them using Commission Sharing Arrangements.
Potential Impact of Regulatory Changes
Of course, the obvious question we ask ourselves after reviewing these financial results is how the FCA’s recent policy changes regarding the use of commissions to pay for corporate access and investment research might eventually impact a successful independent research firm like Autonomous.
Obviously, going forward UK asset managers will not be able to pay a research firm like Autonomous for the corporate access services it provides using client commissions (either trading or CSAs). Instead, they will have to pay Autonomous for this service using hard dollars – a move that many asset managers will be loath to do.
In addition, we expect that the FCA’s recent policy pronouncements around the use of client commissions to pay for research will prompt most UK asset managers to become more cautious in their use of “bundled commissions” to pay for research as they will have to justify their commission spending. In our mind this could prompt a reversal in the recent trend seen at Autonomous where a greater percentage of their revenue comes in the form of direct trading commissions. Clients will likely use more CSAs or hard dollars to pay for the firm’s research in the future. The real question is whether this will translate into reduced revenue for the firm.
Autonomous Research’s UK operations posted an extremely bullish financial report for the twelve months that ended March 31st, 2014 reflecting the continued success that the firm has been able to experience since its founding five years ago.
Unfortunately, recent regulatory developments in the UK could create headwinds for an independent research firm like Autonomous which has historically been able to produce a highly desirable research product, and which has built the infrastructure to enable clients to pay for their research the way they preferred.
The management team at Autonomous Research (and at most other investment research firms) will need to start reevaluating their business models and decide how best to grow their research businesses given the new rules of the game.