http://www.marketwatch.com/story/sing-the-alphabet-song-the-google-parents-stock-just-broke-out-2016-10-19
http://www.waterstechnology.com/inside-market-data/news/2474717/smartkarma-opens-hong-kong-office-hires-research-vet-blennerhassett
The landscape for technological transformation is experiencing another major paradigm shift, and the “cloud” is the latest buzzword.
Put simply, cloud computing is computing done online. In the past, users would run applications from software downloaded on a physical computer or server in their building, whereas cloud computing allows them to access apps through the internet.
Many global customer-facing brands have successfully migrated their product range to the cloud in recent years. Noteworthy examples include Microsoft and Adobe, whose flagship cloud-based suites Office 365 and Creative Cloud have been widely successful.
There are several tangible business benefits to implementing cloud offerings, including flexibility, increased collaboration, and enhanced analytics. Despite this, uptake in the investment research space has been slow amongst its major players. CFOs of global investment banks who dominate the investment research space are generally wary of cloud migration because it demands a considerable shift away from traditional computing methods, roles and business processes, which can be time-consuming and expensive to execute.
In this piece, we consider the benefits of cloud-based research for investors and ask whether the future of investment research lays in the cloud.
The Potential Advantages of The Cloud for Investment Research
Increased Collaboration – When analysts can access, edit and share documents anytime, from anywhere, they’re able to do more together. Cloud-based workflow and file sharing help analysts share insight in real time and gives them full visibility of their collaborations.
Work From Anywhere – With cloud computing, if you’ve got an internet connection, you can be at work. And with most premium cloud services offering mobile apps, analysts are not restricted by which device they’ve got to hand.
Remote working allows analysts to access intelligence from the world’s premier analysts, academics, data scientists and strategists, regardless of where they live.
Streamlined Document Control – When a firm makes the move to cloud computing, all files are stored centrally. Greater visibility means improved collaboration, which ultimately means higher quality insight and a healthier bottom line.
Investment research providers that are still relying on the old way are missing opportunities for analysts to collaborate easily across different time zones and regions, making it harder to create groundbreaking research.
In a recently published report by EY, the global consultancy found that “CFOs who truly understand cloud technology, as well as the associated challenges and risks, are better placed to manage the impact of cloud computing on the finance function and potentially gain a competitive advantage over less informed competitors.”
The Cloud: The Most Viable Long-Term Strategy?
An important consideration for CFOs ought to be the viability of their product range over the long-term.
Cloud-based investment research platforms that provide valuable insight in real time will appeal to millennial buyers, the first true generation of “digital natives.” Born between 1980 and 2000, millennials are about to move into their prime spending years both personally and professionally. Millennials are one of the largest generations in history, even larger than the Baby Boomer generation in the United States.
In a recently published article, Goldman Sachs wrote that: “millennials are poised to reshape the economy; their unique experiences will change the ways we buy and sell, forcing companies to examine how they do business for decades to come.”
The considerable effect that millennials’ affinity for technology has had on the retail space has been well documented, but it is becoming apparent that it will reshape the B2B space as well.
In a report written by Think with Google, the company found that millennials are increasingly holding B2B businesses to the same standards as consumer brands. They expect B2B brands to offer a seamless user experience across all channels and this is influencing their purchasing decisions. This trend is backed up by the findings of the report, which found that when researching vendors, the first priority for millennials is the ease of doing business. The second priority is the vendor’s ease of access to relevant data and statistics.
Investment research providers that continue to use the outdated model of publishing and distributing investment insight as disparate PDFs via email are likely to struggle satisfying millennial buyers with growing purchasing power in the coming years. With product information and price comparisons available at their fingertips, millennials are turning to firms that offer maximum convenience and value, at the lowest cost.
The Global Impact of Research Unbundling
This trend is likely to be compounded by the growing number of countries that have decided to “unbundle” investment research. In Europe, the revised Markets in Financial Instruments Directive (MIFIDII), which is planned to take effect in January 2018 will require asset managers to separate research payments from execution costs. If the firm wishes for a client to pay for research, fund managers will be expected to report on the individual research providers paid from the account, the amount they receive over a given time period, and the services they provide.
With their purchasing decisions placed under greater scrutiny, asset managers will be incentivized to “shop” around for a better deal. The firms that are likely to reap the benefits of this new regulatory landscape are those who deliver meaningful investment insight in real time at an affordable rate.
Investment banks who continue to charge a premium for research to sustain bureaucratic operational processes and overstaffed research teams will need to rethink their existing processes to remain competitive.
The UK’s Financial Conduct Authority (FCA) published its third consultation paper last week on the implementation of the revised Markets in Financial Instruments Directive (MIFIDII), a rulebook that will rewrite Europe’s trading rules top to bottom.
The third consultation paper focuses on a number of business of conduct issues, designed to make the financial markets more efficient, transparent, and responsible.
Investors operating in the United Kingdom should take note that the paper contains important clarifications on the continued use of Commission Sharing Agreements (CSAs), a widely discussed topic in the financial press in recent months.
Key proposals of the consultation paper include:
- Strengthening inducement and research rules to drive better competition in the investment research space;
- Ensuring research is only produced and consumed where it adds value to investment decisions;
- Implementing requirements of full disclosure and transparent pricing models.
What is the FCA’s position on CSAs?
Specifically, the FCA said that any research payments received by brokers alongside transaction fees must be immediately deducted, or “swept” into RPAs (Research Payment Accounts). The FCA further added that this should take place “daily or within the settlement period for the transaction, although detailed reconciliations may take place less frequently, eg weekly or monthly.”
Currently, any funds that a broker receives under an existing CSA must be paid out at the end of each month, once the funds have been reconciled with its client. In a word, this is the FCA’s way of saying the existing model is no longer good enough.
Andrew Bailey, chief executive at the FCA, said in a press release last week published by the FCA:
“Strengthening consumer protection is one of the key aims of MIFIDII and this aligns with, and advances, our own statutory objectives. The changes to rules we are proposing today reflect key themes that we have worked on in both retail and wholesale markets over recent years to promote competition and market integrity.”
Bailey goes on to add:
“As we said in our statement following the EU referendum results, firms must continue to bide by their obligations under UK law including those derived from EU law. They must continue with implementation plans for legislation that is still to come into effect, of which MIFIDII is one such example.”
How has the FCA’s position been received?
Some firms did not expect the FCA to crack down so suddenly or thoroughly on the continued use of CSAs.
David Pearson, head of post-trade strategy at technology firm Fidessa, recently said in a Financial News article: “We always thought the CSA model will have to evolve but the FCA has said that it will have to evolve much more drastically than people had previously hoped.”
The FCA’s position on CSAs, and on research unbundling more generally, has bolstered the United Kingdom’s already strong commitment to capital markets reform. Once MIFIDII goes into effect, there is a strong chance that it will fragment the research investment space within the United Kingdom, which could, in turn, affect the wider European research landscape.
The UK has long been regarded as a pioneer of regulatory reform in Europe, with roots stretching back to the 2001 Myners report. More recently, the UK cracked down on corporate access payments in 2013, a move criticized by many of its neighbours on the continent.
In France, the reaction to MIFIDII has been unfavourable. Its regulators, the Autorité des marchés financiers (AMF) are strong advocates of Commission Sharing Agreements and open critics of Pan-European research unbundling initiatives.
In a recent consultation paper, the AMF said it preferred a “literal transposition” of the MIFIDII rules, given that they were “the result of a compromise reached following highly involved discussions and negotiations.”
On the topic of CSAs, the AMF said specifically that the MIFIDII “rules appear not to be incompatible with commission-sharing agreements.” The French regulators went on to say that the operational processes for monitoring expenses will need to be updated to meet the new requirements on research payment accounts, but it is unclear how this will be achieved at this time.
Will all EU-member states be forced to comply with the new rules on CSAs?
As the MIFIDII rules falls under a directive (opposed to a regulation) not all countries within Europe will be forced to take the same position as the UK on the continued use of CSAs, as exemplified by the situation in France. There is room for national leeway on the implementation of MIFIDII and its technicalities.
“Regardless of national regulatory interpretations, Smartkarma believes that competitive forces will see funds “comply” with whoever is most stringent. In other words, whatever is held out to be the “Gold Standard”. Competition for Assets under Management knows no national boundaries, given the part played by multi-national asset managers. Ultimately asset owners will demand “gold standard” investor protections whenever, and wherever, they choose to allocate their capital,” remarks Jon Foster, Co-Founder of Smartkarma.
The team at Smartkarma feel confident that research unbundling will rejuvenate the European investment research space, resulting in better quality research at fairer prices for buyers.
For more on the ways that MIFIDII will change the way that research is bought and consumed within Europe, read our blog post here.