New York, NY – In recent months, various buy-side executives we have spoken to have expressed an increasing frustration over the way that many sell-side firms, as a part of their negotiation process, are arguing that they are not paying enough commissions to warrant their existing levels of research service.
In fact, some have gone so far to accuse the sell-side of randomly raising the commission levels required to obtain various research services in an effort to boost short-term revenues.
While we have heard some stories to support this view, it is clear to us that the lack of transparency in the marketplace has created a contentious environment where many sell-side firms are aggressively leveraging their information advantage to maximise commissions. Unfortunately, most buy-side firms have previously had no way to level this playing field.
Of course, many sell-side firms (and even some buy-side firms) have argued that this issue is an extremely complex one that cannot be resolved by simply providing a “rate card” for research. And while we admit that investment research is a complex service, it is also clear to us that the lack of transparency in the marketplace — particularly with regards to proprietary sell-side research — is such that most buy-side clients secretly believe they are overpaying for this research.
At this point, many independent research providers like to jump in and argue that both the high quality and lower cost of their research services make their offerings a better “value” than the research provided by their sell-side counterparts. And while we do agree that many indies provide high quality low cost services, we also must note that many independent research firms do not offer the breadth of research or the suite of services that the buy-side really values. As a result, many of these independent research firms are not as compelling a “value” as one might initially think.
The lack of price transparency of sell-side research, and the uncomparability of independent research, has made this issue an extremely confusing one for most investors. Consequently, Integrity has been getting increased demand from buy-side clients to help them get a better handle on the research pricing issue so they can make their “good faith determination” if they are paying an appropriate amount for the external research their firm is consuming.