Will MIFID2 end up as another cash cow for investment banks?

It will take some bravery for a hedge fund to break from the well-trodden, familiar path of accepting research from their present provider, to pioneer the engagement of an independent research provider; the easy choice is to go with their current providers, biting the bullet on payment.

Despite independent research having to stand by a track record, be impartial and cheaper, most hedge funds will fear losing the services of the current providers, in the belief they will receive preferential treatment for pricing, etc.

It remains true, however, that the track records of independent research providers stand up to scrutiny, whereas many analysts at the larger banks are able to take cover under their company’s well-known name, which many feel bestows the impression of reliability and incontrovertible accuracy – nevertheless, few independents would gain credibility from continually calling for 3% or 4% US Treasury yields, or $70 oil, or parity for Sterling, in the same way that banks have during 2017, and few bank strategists understand managing risks and so disregard this consideration.

Being forced to pay for research, fund managers should expect a better service, or go elsewhere. The big banks are offering cheap, basic reporting, from obscure little known researchers, while the add-ons for meaningful research will cost thousands. Research will be on the topics of the bank’s choosing, often with a biased slant. Banks will only provide generalised, widely distributed, generic research for the ‘set fee’, which will be impersonal, the same for every client – but for anything more detailed or targeted to purpose, these large providers will negotiate case-by-case fees, which are expected to be costly and vary from client to client.

In contrast, an independent researcher can provide bespoke research, relevant to the fund’s objective, be on call for discussion and prepared to meet within a reasonable time, (and not be told ‘I’m travelling next week, I’ll call you when I get back’).

How many bank analysts look solely at headlines and fire-off reports echoing data, prima facie? US Average Hourly Earnings data are a good recent example of the dangers of taking headlines at face value, which can be misleading, where more carefully considered research can provide an invaluable advantage.

So fund mangers may regret not doing their homework better, and by the time they realise they are only receiving a very commonplace service for their (not inconsiderable) expenditure, many independents could be out of business. Those that appreciate the worth of bespoke research to their business will be the forerunners in securing the services of the best independent researchers now – either on a consultancy basis, or by offering them an in-house position – before their invaluable skills are lost to the industry.