The following article is by Gabe Lowy, a former sell-side technology analyst who is founder of TechTonics Advisors, a provider of strategic communication for technology companies. This is the second article of a two-part series.
Research providers need to become more software-driven to adapt to a changing investment landscape. They will have to adopt statistical modeling techniques using modern analytics tools to provide clients with a deeper understanding of key performance variables (KPVs) that drive markets, sectors or individual securities.
Software can help evolve sell-side business models from the convention of pushing ‘free’, high-volume, low-value research products – usually via email – to client in-boxes with the hope or expectation that clients will pay for it. Instead, the sell-side should adopt a consulting model built around a commerce site that pulls clients into the site with high-quality, independent research products that may be created internally or sourced from independent research providers (IRPs).
E-commerce for Research
Clients would register and create a profile at the site for free. All content on the site would be categorized and indexed so that clients can easily search or navigate the site to find research relevant to their inquiry. Content of any format (reports, webinars, podcasts, presentations) would be readily downloadable with prices for each clearly marked.
Clients would also have the option to commission bespoke research, such as a market study or survey, quantitative analysis for specific inquiries, or a standalone report about a particular sector or company. Clients could also see a schedule of events, such as conferences and non-deal road shows. Since all events would be fee-based, clients would pay at the time they register for an event. Events would have a 24-hour cancellation notice to avoid a charge.
Leveraging New Technologies to Add Value
Demographics, regulations and technology are fundamentally changing the investment industry – and the research function in particular. Yet sell-side research techniques have hardly evolved, perpetuating high-cost and inefficiency. As true fundamental research has evaporated, the sell-side analyst function has been reduced to three principle tasks:
- Providing institutional clients access to management via conferences or road shows;
- Handicapping quarterly results with low-value data of limited validity or veracity; and,
- Covering the firm’s underwriting clients, stirring questions of conflict and bias.
Under “best interests” and MiFID II regulations, these services will demand new business models. To add the most value to clients in this changing environment, content should focus on the KPVs that drive a specific market, sector or security. To achieve this objective, we envision sell-side firms evolving into one of two business models:
Option I: In-House Data Analytics Model
Sell-side firms that want to produce research in-house should consider replacing “fundamental” analysts with sector-expert data analysts. These analysts would combine quantitative and qualitative techniques to determine KPVs. A typical report would describe a company’s business, and include a quantitative analysis of KPVs that drive the business. This analysis would include input variables ranging from historical data on the sector and competitors to newer forms of big data.
A simple example might be the effect of raw material costs on a consumer product company’s pricing and margins against a backdrop of shifting distribution channels. Another might be a what-if analysis of credit risk under different macro and micro scenarios. A more complex example would be an analysis of the securities underlying a particular index fund or ETF.
In this model, the firm continues to bear all production costs, liabilities and compliance requirements. The firm sets pricing and transacts directly with clients through the site.
Option II: Film Industry Distributor Model
Under this scenario, all analysts become independent contractors, or IRPs. Like the film industry, these “indies” produce high-quality content tailored to a specific market, sector or security (genre). IRPs bear all production costs, responsibility for content quality and accuracy, and compliance requirements, including all necessary disclosures. An IRP must receive accreditation from the relevant regulatory body (for example, FINRA in the U.S.).
An IRP registers and creates a profile on the distribution platform site for free. The distributor provides a second layer of quality control and compliance by accepting content only from accredited IRPs. It curates all of the content these IRPs want to upload to the site. The distributor adds a disclaimer stating that the research is from an accredited IRP, and reinforces that the quality and accuracy of the content is the sole responsibility of the IRP. By acting as a gateway, the distributor prevents rogue or malicious content from corrupting the integrity of the site.
Pricing for the content is set by the IRP. The distributor charges a flat percentage fee for each piece of content uploaded. This fee goes toward maintaining the site. When a client downloads a piece of research, the distributor handles the transaction and the IRP is automatically notified. The distributor deducts the fee and forwards the balance to the content provider.
The site would also allow buy-side research purchasers to rate IRPs. This could either take the form of a simple star system or provide space for full client reviews. No ratings or reviews could be done anonymously. Reviews could only be posted by a client who purchased the content they seek to rate or review. The distributor would check all reviews for suitability (i.e. appropriate language) and to prevent “review stuffing” (only one client review allowed per content downloaded).
Distributors that adopt a hybrid model must present their in-house research products as an option alongside those of IRPs. Their content may not be favored in searches or placement. The creator of the research content and the pricing will always be transparent to the client.
These new business models are software-driven. They provide a deeper level of analysis across much broader data sources to determine the KPVs that clients value most. These models reduce costs by automating processes and eliminating unnecessary staff, such as institutional sales. They also provide a more efficient delivery system that is easier for clients to use, with greater transparency and security. This is the sell-side of the new Investment Research Manifesto.