Benjamin Quinlan, CEO and Managing Partner of Quinlan & Associates, has an extensive track record advising many of the world’s leading multinational companies, financial services organisations, SMEs and start-ups on a variety of high-profile strategic engagements. We chat to him about the changes that we should expect from ORMs.
Why are ORMs set to transform investment research?
It is clear the research industry is fundamentally changing – at its core, the business is becoming more digital, with brokers investing heavily in the development of their online research portals in an effort to move from a ‘content push’ strategy to one focused on ‘user draw’. While such efforts are a step in the right direction, they fall short of providing a truly effective solution for the buy-side, given the various subscription costs being charged by brokers for access to their platforms (some of which appear relatively high), a reluctance by managers to navigate a plethora of proprietary portals for their research needs, the varying degrees of content quality and user personalisation that exist across various platforms, and managers’ preference for a standardised and impartial tool to measure their research consumption.
In an effort to create a one-stop-shop solution for the industry, we have witnessed a raft of online research marketplaces (ORMs) emerging, such as Alphametry, ResearchPool, and Smartkarma, to name a few. These firms provide a forum for research firms and even individual influencers to contribute content, with proprietary search engines tailoring output to the end user’s criteria. Similar to online travels agents (OTAs) such as booking.com and Expedia, we see ORMs becoming the dominant platforms for content sourcing and distribution in years to come, representing a ~USD 1.4 billion market by 2020 and a ~USD 2.4 billion market by 2025, comprising ~15% and ~30% of the global research wallet respectively.
What does this mean for investment managers in terms of finding unique insights?
The open, transparent nature in which content can be sourced through an ORM means research contributors will need to consistently focus on the creation of unique, insightful content to remain relevant. As such, maintenance research will gradually become less valued by fund managers.
The process of finding relevant insight will also become much easier for the buy-side. Many of the ORMs not only personalise their interfaces according to each manager’s individual investment strategy/focus, but most also employ smart algorithms to better understand usage behaviours so that only relevant information is presented and done so in a timely manner.
How can the cost and effectiveness be measured?
There is no standardised way to measure the effectiveness of investment research. However, some criteria that may be used include the uniqueness of insight, the reputation of the research firm/analyst, and accuracy of recommendations.
There is a clear operational and compliance benefit to using ORMs; their ability to provide standardised and impartial research consumption and evaluation solutions (including reports) helps users meet their compliance obligations under MiFID II. Many platforms also offer evaluation mechanisms, allowing users to rate the quality of content/providers, much in the same way as hotels can be evaluated via rating mechanisms available on OTAs. This makes them an extremely attractive proposition when compared to the bespoke reporting solutions offered at present by each individual broker.
Who are going to be the winners and losers in this space?
As pointed out in our June report, A Brave Call, research departments of bulge brackets and tier-2 research firms will find it increasingly difficult to justify their business models post-MiFID II. Research consumers will also become more discerning in their consumption decisions as they look to source more of their content from cost-effective and high quality IRPs (rather than paying for unnecessary waterfront coverage). Moreover, with many managers opting to pay for research out of their own P&L and brokers revising their pricing schedules downwards, the decline in research wallet is likely to be more significant than many expected. Due to difficulties in managing a sticky cost base, we are likely to see some brokers operate their research departments out of a separate entity (such as the Exane BNP Paribas JV in Europe) or source their content needs purely through IRPs/ORMs (such as the tie-up between Societe Generale and Smartkarma in Asia). If not, we feel a number of research departments will find themselves underwater after 2018.
We are also seeing a strong correlation between the impending MiFID II reforms and the growth of new entrants in the IRP market. Many of the new IRPs are headed by prominent analysts, coveted for their high-quality coverage after having built up a substantial investor following during their sell-side careers. We forecast more senior analysts from both bulge bracket and tier-2 firms to go it alone or join buyside in-house investment firms in coming years, as integrated brokers struggle to monetise their waterfront coverage and budget cuts weigh on analyst compensation.
Ultimately, we believe end investors will benefit from increased competition, greater levels of price transparency, and the ability to access content on-demand.
What does it mean for the transformation of the investment management business around this model, rather than the traditional sell-side driven model?
ORMs will become a critical part of the future investment research ecosystem.
On the buy-side, it is widely recognised that investment managers are currently awash with an oversupply of duplicative research reports, much of which is considered of questionable value. Through providing a centralised solution for the buy-side’s research needs (from content sourcing, through to compliance and reporting tools), we expect more managers to leverage ORMs as their key research management solution, rather than navigating multiple sell-side portals that are not interoperable.
Whilst there are numerous limitations to proprietary research portals, we believe they will still have an important role in future. However, we believe all brokers will ultimately need to feed their content to ORMs in order to cover the widest spectrum of buy-side clients possible (just as the major hotel groups advertise their rooms through OTAs, in addition to their own websites), especially as managers look for a one-stop-shop solution for their research needs. We also believe there is intrinsic value that major brokers will continue to provide in terms of premium services around access to corporates and primary deal flow. However, it is clear that ORMs are going to be a major disruptor in years to come.
FundForum International will take place in Berlin, 11 - 13 June 2018 and is made up of five pillars: Business Leaders Forum, Fund Buyer Solutions, FundForum Ops, FundForum Global ESG, and FutureFinance 2.0. Find out more >>
