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Small groups feel the impact of falling investment research costs

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Investment Research Updates

The price of business studies published by independent vendors fell 8% last year, as fierce competition from large investment banks continued to squeeze revenues from smaller analytics firms.

Independent research providers have complained to regulators in the UK and Europe that their businesses are suffering from what they see as unfair competition after big banks have slashed the cost of research services in recent years.

“Unfair and anti-competitive pricing practiced by investment banks remains the most fundamental problem for independent research providers. Seventy-eight percent of independent research providers believe that urgent regulatory action is needed to tackle predatory pricing by investment banks, ”said Steve Kelly, special adviser at Euro IRP, the commercial body representing 70 independent research providers.

Euro IRP estimates that research prices by independent providers have fallen on average by around 40% since the introduction of the European Market Ruleset, known as Mifid II, in 2018.

Under Mifid, asset managers must separate the cost of buying research from all trading costs incurred in buying and selling securities, an arrangement known as “unbundling”. This was designed to prevent investment banks and brokers from offering research to portfolio managers to entice them to send trading orders to them.

Investment banks responded by lowering the price of their research. JPMorgan, for example, now offers asset managers access to all of its written research results for an annual fee of $ 10,000, with face-to-face meetings with analysts costing more.

Large banks that primarily generate income elsewhere can absorb this decline, but small, research-oriented firms have remained exposed. Some independent providers also believe that investment banks are using research as a lead product, funding this activity from other parts of their business in order to make it easier to sell other more lucrative services to clients.

“Research for investment banking is a route to clients to whom many other much more profitable services can be sold,” Kelly said.

JPMorgan declined to comment.

In April, the Financial Conduct Authority proposed that research produced by independent providers be exempt from Mifid rules covering incentives applicable to investment banks.

The prices charged per research assignment vary widely, but Kelly said that “the drops and continued pressure” have been widely reported by Euro IRP members, especially smaller vendors.

Richard Kramer, founder and CEO of Arete Research, an independent provider, said he believes many investment banks are pricing research services below cost.

“Almost all investment banks subsidize the cost of their research services from other activities,” Kramer said. He also questioned the value of some research. “How are investors well served when 80 percent of bank analysts’ recommendations are ‘buy’? Research produced by sycophants and investment bank stenographers is part of a promotional machine, advertising other banking services, ”he said.