Investment bank research departments are under pressure as never before. A prolonged cyclical downturn, regulatory change and new technologies are prompting a fundamental rethink of how they operate. Productivity will be critical, emphasis will switch from maintenance to alpha-generating output and research departments will embrace new publishing technologies to allow them to personalise their reports and deliver them across the multiple platforms fund managers are demanding. These are the key trends identified by banking specialists Frost Consulting in a new report for Quark, one of the world’s top providers of publishing software to businesses and financial institutions.
Despite recent signs of recovery in the global economy, downward cyclical pressures have yet to abate and M&A activity and IPO pipelines remain weak. These difficult operating conditions have put pressure on all areas of investment bank ROI, in particular their research departments.
This has been exacerbated by the ‘unbundling’ of execution and non-execution, primarily research, commissions and the rise of commission sharing agreements, which allow fund managers to choose where they buy their equity research and has led to a surge in equity research providers.
As the report makes clear, such contracts are rapidly becoming the dominant commission category globally. According to the report’s estimates, as a percentage of total volume traded, in the UK they account for 70%, in Europe, 50%, and in the US, 40%. With regard to large asset managers, in the UK 90% use CSAs, in the US it is 80% and in Europe (ex UK) the figure is 60%.
For investment banks, there is a lot at stake. Globally, execution commission is worth $11 billion while non-execution, primarily research commission, is worth over $22 billion. According to the Frost Consulting report, in order to succeed in this new era “research will have to work harder to stand out.” In other words, investment banks need to look at how they run their research departments, focus on productivity and providing fund manager with the most relevant reports delivered in the most accessible, flexible formats.
To address this, investment banks are turning to new digital publishing technologies for a number of reasons. In terms of improving productivity, such publishing formats as HTML5 allows reports to be easily re-formatted and re-purposed throughout the process to improve research teams’ efficiency as well as their clients’ experience. Quark estimates in the report that adopting its dynamic publishing offer could result in an ROI saving of close to 60% annualised over three years.
The new technologies also address fund managers’ desire to consume their information on demand on whatever device they have with them. “You can receive pdfs on mobile or other devices but it’s not the best format and it can’t be easily adapted or edited by readers,” says Richard Brandt, Quark’s Director of Financial Services Solutions. “Today, you need to be able to offer adaptive distribution with cross-platform and mobile capability. Delivery mechanisms need to be malleable to match how your fund management clients want to receive their research.”
With regard to improving the relevance of what research departments send fund managers and how they can improve their client’s experience, the technology offers mechanisms to create and structure content to make it more useful to asset managers.
“The new platforms allow more interactivity so clients and providers can share and compare views and information, play out and model different scenarios on sectors and stocks with each other etc, which is far more engaging, says Brandt. “You can also tag information, say a word, sentence, paragraph, section or page, which you think is important for your clients to make it more easily ‘findable’ using search engines and you can use meta data to help filter your research output so clients only receive the reports they have a real interest in reading.”
All this has raised suggestions that research departments may operate more like Amazon in the future in how they track and respond to what their fund management clients read. “That’s absolutely accurate, “says Brandt. “But it’s important that clients are aware of this aspect and opt in. Being able to see what your clients are, or are not, reading so you know what they care about is invaluable. With this you can tailor your offering to focus on the research clients value most. It’s more efficient and your clients receive a more tailored service.”
The jockeying among investment banks to adapt to this new era is only just beginning, but what appears certain is that adopting the right publishing technology will be one of the keys to emerging a winner in this global competition.