Published on October 11, 2013 by Guest Blogger
Research managers are accustomed to being criticized by the ‘revenue generating’ departments and of being ask to do more with lower budgets. There are no easy answers to most of the tough questions faced by sell side managers but here are some thoughts.
- Written research
Regulatory and Compliance oversight has resulted in a reduction of broker email and voice mails reaching buy side clients. Fund managers have been reducing the number of analysts with whom they have regular contact. Senior analysts with deep industry knowledge, corporate access and a thorough knowledge of the regulatory environment are still valued. Insight is required for written sell-side-research-challenges-and-solution research to be valued and insight and original ideas are not generated on a daily basis. Analysts need to be measured by the quality of their ideas rather than the volume of their written research output.
- Understanding of client requirements
The buy side has always complained that much of the written research they receive does not match their needs. The only solution to this problem is an up to date MIS system which allows the targeting of research ideas to the managers who would value the research the most. The challenge is constructing and maintaining the database without exceeding a tight budget. Not having a decent client MIS system is a terrible waste of research department funds as most ideas never reach the clients.
- Understanding client profitability
A client who demands a high level of service should only receive the service if it is profitable to deliver. There is no point being number one rated with a client if too much expensive research resource was devoted to achieving the ranking. Therefore managers need to have a system for monitoring the costs of client servicing and matching that with revenues received by the firm. Interestingly, many on the buy side are reportedly reluctant to enter into detailed discussions about the specific costs of sell side research support but that should not prevent sell side managers from raising the topic for discussion.
- Investment banking support
Why not ask investment banking to publish their own research using the company’s official forecasts? If they and their corporate clients value having and ‘independent’ research view then investment banking must be prepared to subsidize the costs of maintaining a sell side research capability. The best argument I have heard in support of the status quo is from sell side managers who say pre deal research is the most avidly consumed of their written research products. They conclude that fund managers want to read research written by an analyst with who they have an ongoing relationship.
- Cross asset coverage
Every few years’ management at some of the banks comes up with the idea of combining equity and credit research. It never works well because the client bases are distinct and therefore there are few economies in client serving costs. The research focus and production schedule for written research differ and are hard to reconcile. Therefore whilst there are merits in introducing a credit view into equity research and vice versa, combining the research departments should be resisted.
- Cross border coverage
Money managers invest globally and regionally. Brokerage analysts therefore need to be able to advise clients with a regional and global industry view as well as a view of the regional and global supply chain for the stocks they cover. Local market insight is also valued but you need to decide where your niche lies if you are a smaller broker and don’t have the luxury of being all things to all men.
- Franchise value
The demise of sell side research has been forecast for the last 15-20 years. Fund managers continue to push for lower commission margins thereby compressing the profitability of the sell side yet resist paying specific fees for sell side research services. Clearly firms derive franchise benefits from possession of a research capability or many research departments would have been closed down in the face of weak cash equities profitability. It may be worth having an internal debate about the price the firm is prepared to pay in return for the broader franchise benefits of a research capability.
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