Ever since the Global Analyst Research Settlement separated banking from research in 2003, the industry has struggled in the midst of falling commission rates and shrinking trading volumes as it searches for a sustainable business model. While independent research, corporate access and expert networks have all emerged as new revenue models, research practices and funding mechanisms remain under assault from regulators and lawmakers on both sides of the Atlantic. And the fallout affects IR practitioners globally.
Certainly the sell side is going through a period of dislocation. While the value of solid research remains intact, who does it, how it is priced and how it gets paid for are all certain to change. Having said all that, equity research needs to get done in one way or another.
The European Union is developing a new set of market regulations, MiFID II, scheduled for implementation in early 2017, calling for greater transparency surrounding commissions (see MiFID II: what IROs need to know). As a result, more asset managers globally will explicitly budget for research expenditures and wring more value from bundled research. Over time, the waterfront coverage provided by global investment banks is likely to become increasingly focused according to geography or industry sector, it’s predicted.
Meanwhile, in response to a court ruling overturning the insider trading conviction of two hedge fund managers last year, US lawmakers have proposed legislation to define insider trading in a way some believe could make primary research activity such as channel checks or expert networks illegal. While far from becoming law in the current divided Congress, the proposal underscores the continued scrutiny and pressure that research practices are likely to face in the US.
The continuing pressure on the sell side is nothing new for IROs, but there is no end in sight. IR professionals across all market caps can expect the pace of musical chairs among research analysts to accelerate. Small and mid-cap company IROs, in particular, will have to work even harder to discover and connect with analysts appropriate for their companies.
The challenges posed by continuing change in the sell side are also the savvy IR professional’s opportunity, however: simply stated, you should strive to be the best sell-side analyst on your company and industry.
One area often overlooked is your industry classification. If your company has gone through substantial restructurings, acquisitions or divestitures, don’t assume the databases used by the financial markets have stayed current; that has implications for indexes and exchange-traded funds you find yourself in. You’ll need to dig out the database owner and educate it on your new identity. You also need to take ownership of company and business descriptions wherever they appear. State the appropriate industry classification in your company description on press releases and in your corporate description in regulatory filings.
Don’t just check the box on risk and sing songs about reward; go beyond the minimum disclosure requirements in those filings to be informative about your company and authoritative about your industry. Open the window into competitive positions, your own market research, and the relative advantages and disadvantages of different players. As you become the go-to source not just on your company but also on your industry, you will gain the trust of the buy side and lower barriers for analysts unfamiliar with you or your industry, increasing the chances of them initiating coverage.
Of course, I realize that following my prescription isn’t easy. First you will have to sell the executive team on your approach. They all want the research, so educate them on the realities of what that will take. Next, you’ll have to win the trust and co-operation of your accountants and lawyers. Everyone will see the risks immediately – your job is to sell your own management on the rewards. But then, isn’t that the job of an IRO?
Business and financial journalist Brad Allen is a former IRO and served as NIRI national board chair between 1996 and 1997
This article appeared in the summer 2015 print issue of IR Magazine
