Research as a Service the future of investment research, just in time for MiFID II
In an era of increased regulation and closer budget scrutiny, institutional investors are going to have to be very deliberate about how they spend their research dollars, John Dwyer said.
Mr. Dwyer is a senior analyst with Celent, a research, advisory and consulting firm focused on financial services technology. He recently published Research as a Service: Assessing the Implications of MiFID II on Investment Research, an analysis of the current state of investment research and how it may look in the future. Rather than determine how existing models can fit in a post-MiFID II scenario, Mr. Dwyer’s report concentrates on how the industry should evolve in a new reality.
Platforms will play a key role, Mr. Dwyer believes.
“It is the insight rather than the power of the voice which should determine the value in the marketplace….. the fragmented future of research will embody a peer-to-peer structure.”
That is good news for both sides, Mr. Dwyer explained. Small boutique research firms tend to focus on the research side, leaving little bandwidth for sales. Such firms can often attract some of the most talented analysts, as they can offer more freedom than a larger one.
“Every major active manager starts with research,” Mr. Dwyer said.
And those managers now have to be more prudent with their spend. Investment firms are going through enormous cultural change as tighter budgets and more scrutiny mean they have to justify where they devote research funds.
“The buy side needs to access the best possible research,” Mr. Dwyer said. “Research aggregators are adapting to MiFID II. Their first approach is to make sure they can validate what they’ve spent on research, that they’ve assessed each report.”
Smartkarma is taking steps others have not, Mr. Dwyer said, citing their pricing strategy, the ability to discuss the research in a live format and the granular search capability. Algorithms deliver more relevant research and everyone gets the same say on the effectiveness of each piece of research. Smartkarma is prominently featured in the report.
Head of business development Sonia Palmieri said Smartkarma’s unique structure contains several factors that differentiate it from the more traditional research-as-a-product model. For an annual fee, institutional investors can access research from independent researchers, whether they be academics, strategists or others conducting investment research. Part of that fee goes to Smartkarma with the remainder reserved to pay authors based on the number of views and level of interaction subscribers have with the piece and the author.
“That’s a key differentiator from research-as-a-product where research is offered at a fixed price,” Ms. Palmieri said. “There, you buy on a marketplace and you have limited availability to judge how much you’ll get out of a piece before you buy it.”
Smartkarma provides insights from more than 100 investment insight firms and roughly 400 analysts. As of late 2016, the Smartkarma community produced content on more than 1,600 companies in 15 Asian markets, with an average of 25 new pieces being added each day. Each item can be discussed in real time.
Subscribers can be sure of the quality of the research on Smartkarma, Ms. Palmieri said. Insight providers are vetted for quality in a closed environment before their research is made available to subscribers.
Once research is available, Smartkarma has an additional safeguard in place to ensure subscribers get fair value, Ms. Palmieri said. The research that is getting read and interacted with is the only research getting paid for.
“It takes away questions of how to assess value retrospectively.”
Smartkarma’s unique approach caught the attention of France’s Societe Generale, who in late 2016 signed an agreement with Smartkarma that will provide Society Generale’s institutional investors with access to the Smartkarma platform.
“The agreement with Societe Generale is groundbreaking,” Ms. Palmieri said. “It’s the first such agreement with a fintech company to provide research.”