This is a guest article by Will Richards, founder of research sales firm Financial Research Solutions. This article is the second of a two-part series on broker voting systems.
In considering whether to participate in the broker voting systems of potential asset manager clients, smaller research providers can be daunted by the effort involved. By their very nature, broker votes provide the highest rewards to research providers with the broadest coverage, typically large investment banks.
Nevertheless, there are advantages to broker voting systems, even for smaller research providers. And in some cases, they remain the only way for a research provider to get paid.
Time line for the process
Voting systems can be frustrating for research providers firstly because they are administratively cumbersome and difficult to navigate without the help of an experienced salesperson, and secondly because most research providers enter into the process without any real understanding of how long the time-line from initial contact to payment can be.
This is most easily understood with the following example.
- January 2014. ABC Research makes contact with a PM at 123 Hedge Fund. The initial meeting with the PM is positive, with the PM promising to evaluate the research over the next few weeks/months.
- March 2014. ABC Research has a second meeting with the PM, after setting up a research trial in the interim. Again, it is a positive meeting, and the PM indicates that the firm has a vote, and he’d like to include ABC in this process. The PM recommends that ABC be admitted to the vote.
- April 2014. ABC Research is admitted to the vote. But because 123 Fund has a quarterly voting process, it won’t be possible to include ABC on the vote for Q1 since it was just completed. This means that the earliest ABC will now be able to be compensated will be for the Q2 vote.
- April, May, June 2014. ABC Research continues to service the PM with positive feedback.
- Early Aug 2014. ABC Research receives Q2 vote results. They are told that an invoice request will be made to them “soon”.
- Late Sept 2014. ABC Research receives its invoice request.
- October 2014. Payment made to ABC Research.
The example above details a scenario that is reasonably positive in terms of a time line. Other factors that can cause a further delay would be if the vote is semi-annual or annual (further stretching out the entire process), if the PM forgets to vote (this can happen, especially the first time a research provider is on the vote list), if the compliance and legal processes are more arduous, or if a firm has a minimum-vote threshold that stipulates payment will only be made if a research provider has multiple users at a firm (for which building support might take a longer period of time).
How does the vote compare to research subscriptions?
There is no straightforward answer to this question, unfortunately. Payment amounts through the vote can be quite variable. Vote results can create some of the largest research payouts from buy-side firms, and – just as often – can result in payments smaller than what a research subscription might be.
As such, it is important to follow the best client service practices possible when working with voting accounts to ensure maximum payment is received.
If a research provider has the potential to have multiple contacts within a broker voting client, then the chances of getting a higher payment are increased. If, however, the research firm is more likely to have a limited number of contacts the likelihood of under-payment increases.
One potential pricing strategy with broker voting clients is to set a minimum price that the asset manager must pay to continue to receive the service. This establishes a floor, but does not prevent higher payments if the research provider is successful in establishing a broader base within the client.
Can subscription payments still be issued from firms that have a voting system?
It depends. Some buy-side firms have both a research vote for brokers with trading desks or research providers using CSAs and a separate research budget for subscription-based research services. Other firms insist that all research providers pass through the vote to be eligible for payment.
What are the advantages of working with a voting system?
- Sometimes going through the voting systems is the only way to build a paying relationship with certain buy-side firms.
- Becoming an “approved vendor” can lead to a better understanding of the firm and their research needs, and lead to a higher probability of renewal.
- It is possible to be paid far more than the list subscription price particularly if the research firm can establish multiple users within a client.
What are the disadvantages of working with a voting system?
- May require a “free trial” that lasts up to a year in length.
- May be paid less than the list subscription price, or not at all
- The voting process can be long and laborious, especially in the case of firms with longer voting periods (semi-annual or annual).
- It is more administratively intensive to stay on top of the voting system and to maximize payments. (One irony of voting systems is that while they streamline the administrative process from the point of view of the buy-side firm, from the point of view of the research provider the voting system is more administratively heavy compared to a simple subscriptions.)
- Some voting systems may have a “minimum threshold”: if you do not get a minimum number of votes, no payment will be issued. This can be especially onerous for research providers that have a niche product and may not have more than one user at a firm, meaning garnering wide voting support for their research might be difficult.
We recently held an internal forum on research pricing and voting systems with our own sales professionals and a number of outside industry experts. There was no consensus on which path was better (vote vs subscription).
One point agreed on by all, however, was that the vote is time consuming and therefore would be a challenge to navigate for an analyst representing themselves with no professional sales assistance. While it is a good investment of a salesperson’s time to deal with the administrative process surrounding the vote, the same might not be true for the time of a research provider’s senior analyst.
In other words, voting systems, while they can produce lucrative pay-outs, are more administratively cumbersome to manage for a research provider than a simple subscription; unquestionably, it would certainly be challenging to manage a vote process and produce a quality research product at the same time.