[ I N - D E P T H
Further consolidation
Looking to the year ahead, it’s likely that buy-side
consolidation will be spurred on as asset managers,
particularly the smaller firms, struggle to absorb the
costs of research in the way their larger peers have
done in order to remain competitive. This was one of
the major predictions from consultancy firm Deloitte,
which wrote in its regulatory outlook report for 2019
that smaller asset managers have seen less benefit
from absorbing the costs of research than larger buy-
side powerhouses.
“Smaller investment managers enjoy fewer econo-
mies of scale when purchasing research, so have had
to make a difficult choice between absorbing signifi-
cant costs and asking their customers to pay. This new
burden for smaller firms, along with other regulatory
costs and competitive pressures, is likely to reinforce
the trend of consolidation in the market,” Deloitte
warned.
Even during the first year of the MiFID II regime,
the industry has seen some interesting developments
in terms of how firms are strategically managing the
unbundling requirements. It’s clear that unbundling
has forced certain brokers to revaluate their business
models. MiFID II has shone a spotlight on execution
performance and quality, forcing brokers to compete
based purely on those merits, and as the buy-side
shrink broker lists after recalibrating the costs of pur-
chasing research, there’s evidence to suggest that the
sell-side is beginning to specialise in either execution
or research.
In November, US-based investment management and
broker AllianceBernstein confirmed that it will ac-
quire institutional research provider Autonomous Re-
search. The move will provide Bernstein, the broking
subsidiary of the $530 billion asset manager, with scale
to expand and build its research business. Similarly,
European equity agency broker Kepler Cheuvreux has
honed in on its research business since the advent of
MiFID II. The brokerage has inked several major re-
search distribution deals with major institutions such
as Piper Jaffray, Swedbank, UniCredit, Crédit Agricole
CIB, and Rabobank, to raise its profile globally and
expand its research client base.
The FCA’s chief concluded in his recent speech that
unbundling has indeed been one of the most debated
aspects of MiFID II, but overall the impact has been
positive, with regulators around the world watching
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with keen eyes to see how this will
play out. But perhaps the implied
dip in research coverage and quali-
ty, as well as the impact for brokers
operating in an unbundled fashion,
is yet to be truly realised.
Bailey stated that the new
framework has been designed to
increase accountability and thus
create a newly competitive market
for research. But he reiterated that
competition creates winners and
losers. There’s no doubt that end
investors have seen some financial
gain as a result of unbundling,
although the journey towards full
transparency has only just begun.
With the buy-side facing further
consolidation in the wake of rising
costs, while the sell-side battles
to win business amid increased
scrutiny on execution performance
and research quality, picking apart
the end results of the research
unbundling conundrum may take
some time.
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