TowerGroup Reports on CSAs and CCAs

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New York – In a September 5, 2007 press release, TowerGroup—a provider of research and advisory services for the financial services industry—stated that it has recently released two new studies on how CSAs and CCAs will impact the research industry:

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  • Making Sense of the Upheaval in Investment Research

<!–[if !supportLists]–>Mirroring predictions that Integrity has been making for years, these reports argue that the adoption of CSAs and CCAs will put cost pressures on sell-side firms that fund their research operations with brokerage commissions.  CSAs and CCAs—which allow investors to pay for third-party research through a single trading counterparty—provide the buy side with the incentive to trade primarily with those providers who provide best execution, hurting firms that provide high quality research but cannot compete on execution. 

The reports predict that there will be a “contraction in the number of broker-dealers worldwide by 25% between now and 2012.”  According to author Dushyant Shahrawat, “the unbundling of agency brokerage services will expose the current overcapacity in investment research, resulting in marginal providers being sidelined, and even in some prominent brokers exiting the research business.”  The unbundling process, Shahrawat posits, could take two to four years.  This strikes us as a reasonable prediction—the transition to CSAs and CCAs will not happen overnight, but they are likely to be adopted in the near term. 

Another consequence of unbundling, the TowerGroup reports argue, is that it will provide the buy side with greater clarity on their research spending.  Under the current system of bundled commissions, many money managers do not have a clear sense of how much they’re spending for research, making it hard for them to determine if they are deriving sufficient value for the cost.  As commissions become unbundled, money managers will be able to examine those costs, and reallocate their research spend towards the more value-added providers. 

The TowerGroup report predicts that as commissions become unbundled, the buy side will find that it is overpaying for traditional sell-side research and reallocate research commissions towards alternative research providers with unique offerings.  Specifically, the TowerGroup predicts that the buy side will reduce its spending on sell-side research by a third: “In 2002, 65% of US buy-side research dollars went to traditional sell-side brokers as compensation for research; by 2010, only 34 cents out of every buy-side research dollar will end up in the sell side pocket as research payment.”  According to the author: “The future of sell-side research remains bleak amid enormous pressure from the tough economics of the research business, bolstering of internal research by buy-side firms, and independent research providers knocking hard on the buy-side door.”

The reports also predict that the rise of CSAs and CCAs will prompt the buy side to increase spending on research management technology by 22%, from $488 million (USD) in 2006 to 1.07 billion by 2010.   “As buy-side firms strive to better manage their research departments,” the author argues, “they will invest in automating the research process and adopt technologies like intelligent search, research performance tracking and research management.”  This is slightly higher than Integrity’s own predictions about buy side spending on research management technology, but perfectly plausible, given current industry trends. 

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