This space recently addressed the topic of how independent research firms can solve their sales and distribution problems. One of the solutions discussed was to work with an agency broker. Integrity Research effectively laid out the pros and cons from the point of view of the research provider. But how does it look for the broker? What does an agency broker need to do to build an independent research sales platform that’s best-in-class and profitable? The following are the key ingredients, in the view of John Pitt, the co-founder and former co-head of Instinet’s Access independent research sales platform.
Effective Sales Force
An agency broker’s independent research platform is first and foremost a selling machine. This is the research provider’s key need. If the sales team cannot actually close deals, it is of limited use to the provider and the platform will not attract the best research firms. A broker’s research salespeople need to be good, they need to be dedicated solely to independent research sales (no channel conflicts) and they need to be fully incentivized.
Closing the sale is just the beginning. To maximize long-term client value the broker’s sales team needs to provide relationship support. That means making research calls, setting up client-analyst meetings, upselling and getting research invoices paid every quarter. Relationship management helps the provider hold onto its clients and it enables the broker to maintain a flow of revenue share long after the sale.
A broker’s independent research platform needs to be conflict-free in all ways. If the broker represents providers that overlap in coverage and methodology it will confuse clients, distract salespeople and irritate providers. Similarly, the broker’s providers should not be represented in the same marketplace by other brokers or by their own sales forces. If a research provider has an existing sales force, the broker needs to zone carefully.
An agency broker’s value proposition to the provider is that of business builder, so the broker needs to accept all forms of payment for the provider’s research. This includes CCA/CSA payments by other brokers and direct cash payment by the client. The broker should also be flexible about bundled payments on a case-by-case basis. That said …
High-Quality Execution and CMS
… the broker is entitled (indeed obligated) to try to persuade as many research clients as possible to pay through its trading desk. The better and more diverse the broker’s execution capability, and the more efficient its commission management services, the more successful it is likely to be.
In prospecting for its research providers, the broker will need to go beyond its trading footprint. The broker’s research marketplace includes any institution that could use the providers’ services, whether or not that institution has a trading relationship with the broker. If there is overlap and the trading desk can open the door to a portfolio manager or analyst, that’s good, but ancillary.
It is important to co-brand with the providers at every opportunity. Research reports, marketing material, invoices and web sites should carry dual logos and proclaim the relationship. This builds the agency broker’s research brand and credibility. Equally important, it ties the broker to the research provider in the client’s mind and can help to channel payment through the broker’s trading desk.
An agency broker’s independent research team should include a marketing capability. The broker will need to work with its providers to position their offerings, re-package where necessary, help with the design of research reports, and create effective marketing collateral and background sales materials.
As a FINRA-regulated entity, the agency broker will need to ensure that its independent research platform is in compliance. The requirements are usually less onerous for independent providers than for proprietary research, but each agency broker will need to make its own determination, and have the structure in place to support it.
Transparency and communication are the keys to successful long-term relationships with the providers on the platform. Providers often worry that their valuable ideas are being given away gratis to trading clients, or that the broker is exploiting them by reaping huge trading mark-ups on their research. The agency broker may need to educate them on all points. The more transparent the broker’s research sales, distribution, pricing and payment procedures are, the better.
Follow these principles of excellence in building an independent research sales platform and an agency broker will likely reach this conclusion – the ideal platform would feature a fairly small number of providers, each of extremely high quality. A thoughtful due diligence process is needed to help select the right providers. (What constitutes the “right provider” is a detailed topic in its own right and cannot be covered here.)
What about the economics of an independent research sales platform like this? Rule of thumb, if the agency broker charges its providers a market-competitive revenue-share rate and channels most (say two out of every three) research payments through its trading desk, it could capture around half of total topline research revenues. From there, it’s a question of managing costs accordingly. Then there are the extras, difficult to measure but far from intangible. Research may open trading accounts that eventually become much larger than the research chit. Existing trading accounts could become stickier. And through research, an agency broker launches a new channel into the institutional marketplace that, over time, it could leverage further.
John Pitt, CFA, was co-founder and co-head of Instinet’s Access platform, which provides outsourced sales and marketing to independent research providers. Previously, he was head of investor relations at Instinet Group and, prior to that, research director at Redbook Research, which produced independent industry research on the retail sector for institutional investors.