The State of Independent Research in Europe


New York – A recent report on European independent research reinforces the view that unbundling of investment research has not met the expectations raised by the Financial Services Authority’s (FSA’s) issuance of  CP 176, implemented in June 2006.  A report by Clearpath Analysis, a financial publisher, includes commentary from European investors and research providers on the state of independent research.   The consensus is that independent research has made inroads during the last four years, but the landscape in Europe remains skewed in favor of proprietary research providers.

Elizabeth Fernando, Deputy Chief Investment Officer of the Universities Superannuation Scheme (USS) the pension fund for employees of UK higher education, sees no change in the level of transparency in proprietary research.  Fernando said that the fund pays all providers by check, and does not participate in commission sharing arrangements (CSAs).  Christian Gattiker, strategist at Julius Baer, noted the reluctance of the sell side to provide transparency, “Indeed, if I talk to sales people they tell me that if you talk about price, i.e. cost, then you have already lost the game.”

One major issue with unbundling is that unbundled research is subject to value added tax (VAT) of 17.5%, whereas bundled research is not, according to Fernando of USS.  Richard Kramer, managing director of Arete Research a London-based independent, indicated that some investment banks which provide CSAs insist that the first 20% of trades be used to pay for their proprietary research, and argues that there is no reason for investors to ‘pre-pay’ for proprietary research.

As we reported in June, the market environment in Europe is tough for both independent and proprietary research. Charles Allen, principal at Consumer Equity Research a UK based independent, noted that the resurgence of the IPO market is putting additional pressure on independents, since investors tend to allocate more commissions to investment banks to ensure IPO allocations.

Several of the contributors noted that independent research is increasingly focused on bespoke research.  According to Kit Juckes, head of fixed income research at Societe Generale’s investment bank, “Independent research has the advantage of being purer research in the sense that it is tailor made to what a specific client wants and needs…”  In his opinion, the advantage of sell side research is that it draws on the information flow from its clients and trading desks, thereby offering market insights that independents cannot match.  The downside is that sell side research is offered broadly, whereas independent research is not.

Professor Bruce Weber, professor of information management at London Business School agreed that “the bespoke model sometimes is the better revenue generator than what we think of as traditional securities research which is producing opinions and publishing them broadly.”

Fernando of USS believes that independent analysts have more time to devote to research because sell side analysts have multiple client constituencies, including investment banking.  She believes that sell side analysts do less primary research.

Services that specialize in primary research seem to be faring relatively better.  Colin McLean, founder of SVM Asset Management, said that they are making increasing use of expert networks and services that provide corporate access.  Julien Zornig, a manager at Warburg Alternative Investments believes that the aftermath of the financial crisis has focused investors more on macro issues, which has benefited independents over proprietary research.

Ultimately, the fate of unbundling rests in the governance of pension funds and investment managers, according to Professor Weber of London Business School.  Until fund trustees begin scrutinizing how research payments are being used and buy side institutions have better procurement processes, the current state of affairs will change only very slowly.

Clearpath Analysis is a publisher which, like conference organizers, relies on sponsors for funding its research.  The report on independent research was funded by  Instinet and independent research firms like CFRA and Spread Research, For the full report, go to


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