New York – Merrill Lynch is launching a new service, called Open Minds, to make alternative research available to its clients. This follows a spate of similar announcements from Morgan Stanley, Goldman Sachs, and UBS. The press release announced that Merrill Open Minds currently has agreements with seven alternative research providers: Asset 4; Audit Integrity; Cypress Advisory, LLC; Decision Resources, Inc.; Global Media Intelligence; HPDI; and Primary Source. The announcement comes as no surprise to regular readers, as Merrill Lynch has been establishing exclusive arrangements with research providers for the past several months (we reported on the deals with GMI and Asset4 in the fourth quarter of 2007). Although the pieces have been coming together for a while, Merrill has waited to announce the project in order to make a more impactful statement about its commitment to alternative research.
From our perspective, this group of providers appears to have been very carefully selected; according to Michael Lynch, Managing Director and Head of Global Commissions Management at Merrill Lynch, over 200 firms were evaluated for the platform, and this final group of participants was only arrived at after extensive due diligence. These seven service providers are all quite different from one another; the value that they might bring to the table is much easier to perceive than it would have been if Merrill had tried to recruit many, more generic, providers into its network.
There also appears to be very little overlap between these providers and Merrill’s in-house equity research. HPDI, Decision Resources, Inc., and GMI are niche industry experts: HPDI focuses on the oil & gas industry, Decision Resources, Inc. on healthcare, and GMI on media. These firms have traditionally been a source of deep industry insight; they do not provide trading recommendations or security analysis, so their analysis can be an excellent complement, rather than a competitor, to Merrill’s own sector and stock research. We have observed that hedge funds are increasingly interested in primary insight from industry sources, as opposed to traditional fundamental reports, and these three providers will give Merrill an advantage in catering to changing tastes.
The other four providers in the group are not industry specialists, but are also quite unique, in that they employ non-traditional research methodologies. Asset4 is a data provider that covers environmental, social, and governance metrics on over 2000 companies worldwide. Audit Integrity also has a focus on corporate governance, as well as forensic analysis, providing forecasts for the impact of such risks as litigation and financial restatements. As socially-conscious investment mandates become more popular, asset managers will find it much simpler to fulfill these mandates if they have access to such providers. Cypress Advisory, LLC is a political intelligence provider: the firm makes use of direct contacts with policymakers and top lobbying firms to provide investors with policy and legislative analysis. Finally, Primary Source is a Merrill Lynch service that will provide clients with custom market research and surveys (the underlying infrastructure for this service may well be provided by Copal Partners, an outsourced market research firm that Merrill announced a deal with in November 2007). All seem to serve unique client needs that would be left unfulfilled by traditional brokerage research.
This move by Merrill confirms that alternative research is an important competitive frontier for sell-side firms. However, Merrill’s approach to partnering is quite different from Goldman Sachs’ Hudson Street initiative, which has been taking minority stakes in research firms; Merrill’s approach seems to be primarily a research marketing alliance (with the exception of its deal with Asset4).
John Svolos, a director in global equities sales, will be responsible for heading up the marketing for Merrill Open Minds. It appears that Merrill will be compensated for its sales efforts by a share of new client subscriptions, as well as the additional trade flow generated by these research providers – according to Mr. Lynch, “trading volumes are correlated with quality research content, and by complementing our proprietary research with third-party content, we expect to attract incremental trading volumes.” Although the main market for this product is currently the United States, the firm is open to global expansion based on client interest.
Thus, while Merrill is obviously interested in competing in the alternative research space, it has left itself with a considerable degree of flexibility. If any of these offerings fails to gain traction with clients, Merrill will find it much easier to drop a marketing partnership rather than an equity ownership.