On Friday, October 13, 2017 NIRI Silicon Valley hosted a luncheon covering the “Transformation of Sell-Side Research.” New regulation, trading technologies, and a clearer quantification of return on investments are fundamentally transforming the relationship between investment research, the buy side community, and IROs. Panelists in the discussion included Mike Rietbrock, Moffett Nathanson’s COO and Director of Research, Paul Thomas , Head of IR RingCentral (former Goldman Sachs and Bank of America Equity Research), Brent Thill , Managing Director of the Internet Research Team at Jefferies, and Moderator, Katrina Rymill , VP of IR Equinix.

“How would you shop for groceries if you were shopping with someone else's money and you didn’t have to let them know how much money you were spending?”

Of course, you’d take a lot more interest in where your grocery money was going if someone else was choosing between artisan charcuterie and sliced turkey. An effective analogy for what is coming down the pipeline for the sell-side of research and the potential impact of new regulation. The Markets in Financial Instruments Directive (MiFID II) implementation deadline in the European Union (EU) is fast approaching (January 2018) and will essentially unbundle pricing models for three key areas of the inequities business: the creation of stocks, research, and corporate access.

What ripple effect will MiFID II have on US Firms?

While the MiFID II will have significant repercussions in the EU market where it will be regulated, analysts predict it will become a best practice in the US markets and thus IROs must adapt and cultivate strategies for creating a balanced approach to investing and making data-driven decisions to conducting research. Larger firms are predicted to be the first to adopt these new EU policies in the US to minimize the interruption to their global business strategies. In what will already be a very impactful regulation, the most affected areas to the sell-side of IROs are research and corporate access. The change will be disruptive in requiring an entirely new level of transparency in pricing models for the three services and it will cause money managers to pay for those services out of their own fees. While the changing landscape of the EU market will be initially received with pushback in the US, it will eventually be a widely adopted best practice.

Scaling research will be pivotal for small and large firms alike creating an opportunity to charge more money for contact with corporate leadership. Creating opportunities for analysts to have exclusive access to leadership can strengthen rapport and build better relationships will be beneficial — but it may not help in putting a price on meetings.

How will it affect IRO’s?

Arguably the largest impact of MiFID II for IROs will be in paid research and corporate access. Many small-to-mid-cap companies will find proving a clear value in investments is an ever-increasing factor in decision making, but MiFID II will change the types of inputs that clients make investment decisions, especially around research. Shifting needs from analysts in direct access to corporate leadership will re-tool company coverage and change the relationship dynamic. This will likely create many difficult conversations around pricing models. Even as granular as phone calls and meetings conducted, the transparent reporting best practices in the US created by MiFID II may force analysts to more of an “outbound marketing” model. With less time to make insightful and creative research, analysts will be challenged early in their career to create the meaningful relationships with companies to inform their key stakeholders. High touch trading desks will feel the strain as they change their strategy towards less distributed meetings and more video conferences to decrease overhead costs. The trading desks that existed in the past with a higher percentage of their budget on research are predicted to become less relevant. 

How will IRO’s will need to change their communication channels?

Fireside chats, proprietary information, and paid research all will likely become packaged as research. Investors will want more direct access to IROs and higher-value information for their decision making. Unique events like panel discussions providing valuable insights will begin to increase in demand in response to the changing way IROs are communicating information. This will require corporations to get creative in making the sell-side feel valued and creating balance in managing across all three models — execution, research, and corporate access.

Inputs for investment decisions are evolving - how does it affect you?

Some top trends are in big data and proprietary ways of using data to make decisions on investments. The integration of technology advancements like AI and machine learning into investing strategies minimizes the potential for human error and allows key stakeholders to analyze exponentially more data than 10 or even 5 years ago. The evolution of technology will further push the need for sell-side traditional research to provide a clear value for what is being provided. As the rollout of MiFID II commences, transparency of fees will pressure investors to want more control over how their dollars are beings spent and in that transparency it will create more competition among pushing execution costs down.