The new European Union regulatory scheme known as Mifid II will change the way research is paid for, requiring payment for research directly or through a dedicated research account, not through trading commissions or soft dollars.
This will not only put the value of research under a microscope, but also promises to dramatically alter the landscape for institutional investors and IROs globally. Some observers predict that the number of analysts in Europe could shrink by one third, with significant attrition among mid-tier research firms that fail to specialize.
Slated to go into effect in January 2018, much of the actual detail has yet to be finalized over the next several months. A recent IR Magazine Webinar on the topic, co-sponsored by Bloomberg, examined the implications for IROs.
‘Research coverage will undergo an upheaval over the next few years,’ predicted Sarah Jane Mahmud, a regulatory analyst for Bloomberg Intelligence who specializes in EU financial regulation.
She predicted that implementation will ‘trigger a contraction on the sell side and a more concentrated buy side’ leading to significant challenges for IROs. She also noted that the implications of Mifid II ‘are likely to resonate internationally’ as large research service providers and investment managers roll out EU-compliant systems globally.
Lyndsay Wright, director of IR and internal communications at betting and gaming company William Hill, predicted that greater scrutiny on the value of research will potentially lead to increased emphasis on thought pieces and downplaying the quarter-to-quarter recap. ‘The good news is it may lead to less focus on financial results and a more long-term perspective,’ she added.
She also predicted that as small and mid-cap firms struggle to maintain research coverage in a shrinking research universe, paid-for research will likely increase as a viable option for them.
Here are some additional predictions. (The full webinar and slides are available on the IR Magazine website.)
- The buy side will both increase its internal research capabilities and cast a wider net, looking to a host of non-bank research entities, from market research firms and independent boutiques to expert networks and management consultants.
- Access to corporate management, already among the most valued research inputs according to the buy side, will gain increased emphasis as analysts seek to differentiate themselves.
- In-depth research reports, also highly valued by the buy side, will increase and quarterly recaps will likely decline. While a focus on long-term trends will be welcomed by IROs, it raises the possibility that more provocative, and potentially misleading, ‘thought pieces’ will be issued as a way for analysts to raise their profile in a particular sector.
- Demands on IROs will grow with increasing requests for corporate access, buy-side analyst contacts and input into more in-depth reports. Wright observed that already-lean IR departments may need to make the case with their management teams for increased resources.
- Wright also recommends IROs use tools such as detailed fact books that can bring investors on both the buy side and sell side up to speed, providing enough detail for them to begin building their models.
