“Aggressive lowball pricing” from investment banks is beginning to squeeze boutique research providers’ business models following the introduction of new EU markets rules, an industry survey has found.
More than a fifth of boutique research providers reported declining revenues in 2018, according to data from Euro IRP, the trade body for European independent research providers.
Under Europe’s sprawling Mifid II legislation, which came into force in January, banks and brokers must charge asset managers specifically for investment research. The change was designed to curb inducements — many banks and brokers historically provided research for free as a way to lure fund managers to trade with them.
The move has prompted big investment banks to slash the prices they charge for analyst research in a bid to guard market share — in most cases to under $10,000 a year all-in, down from the six- or seven-figure sums first mooted around two years ago, although the market remains opaque.
The cut-throat price war, together with moves by asset managers to cull the number of research providers they use, has taken its toll on smaller independent providers who rely largely on research revenues to survive, data from Euro IRP showed.
Around 21 per cent of boutique research providers said that revenues had decreased in 2018 compared with the previous year, while revenues remained more or less flat for nearly 70 per cent of providers, according to Euro IRP’s survey of its 74 members.
Against this ultra-competitive backdrop, the trade body urged regulators to take “urgent action” on research pricing, arguing that boutique houses do not offer trading services and therefore “present zero risk of inducement”.
Euro IRP also said that independent providers need to be offered greater flexibility to market their research to new clients.
“Euro IRP and our member firms individually are …truly concerned that parts of Mifid II, most notably research pricing, are not functioning as they should,” said Chris Deavin, Euro IRP’s chairman.
This is largely due to “cross-subsidisation …by investment banks and major brokers, which is preventing a true level playing field for research providers and denying the best outcomes for end investors”, he said.
The call for action comes several weeks after UK watchdog the Financial Conduct Authority started a review of how the Mifid rules are interpreted. It will ask asset managers, investment banks, brokers and independent providers for details of their research pricing models and examine other pricing methodologies.
Euro IRP welcomed the FCA’s announcement. In a bid to tackle opacity in the market, the trade body has published average prices for research at independent providers, which stood at $45,200 for an all-in annual research service and $7,500 for an in-depth thematic report.
Anonymised feedback from those surveyed revealed the extent of the worry, with one boutique predicting that half of all independent providers would be wiped out in a year and another saying it had lost “all our clients in the UK”.
However specialist providers were more bullish in the long term, with 60 per cent predicting research prices would increase over the next five years.