At approximately the same time each year Peter Lee Associates undertakes its Debt Securities Investors and Australian Equity Investors research programs. Despite these clearly focusing on different asset classes our combined respondent base has some degree of crossover. And whilst, in this case, our focus was on either Fixed Income or Equities we occasionally ask the same — or similar — questions of respondents. And it always surprises us when we learn that feedback from such questioning differs markedly between asset classes — once we had finished collating both sets of results in 2016 we again found ourselves looking at two very different outcomes.
For some time we have been hearing that the way equity markets operate in the future will be more like that now operating in fixed income markets — investors are establishing in-house research capabilities and thereby reducing their reliance on research teams at broking houses; commissions are under significant downward pressure and appear headed toward zero; and other aspects of the business such as corporate access and deal flow, execution services, and account management are now seen as being much more important.
Having said that, research remains a meaningful component of the overall service provided by equity brokers — and institutions are still prepared to pay for it. In 2016, 44% of all commissions went towards paying for research product — this is down from 59% in 2010 but it continues to be the number one reason as to why an institution pays commission to their service providers.
So, for equity investors, whilst their proportional spend on research has decreased significantly, research continues to be an integral component of the service they receive from brokers. But when we do a deep dive into similar feedback from debt investors a different picture emerges.
The question asked of debt investors on this topic — “How do you reward banks for quality research and analysis in the Bond market?” — enables respondents to provide a qualitative answer, as opposed to the quantitative reply we receive from our questioning equity investors. And this is where the dichotomy emerges.
Just over 40 institutions responded to this request:
- 15% don’t reward banks for providing quality research;
- 32% would give their bank a chance to quote on more business but not provide any guarantees on winning a greater share;
- 31% said the bank would be top of mind as a result but wouldn’t necessarily receive any business directly attributable to research quality;
- 22% would ensure the bank received more business.
And the message from this? Banks can continue to produce as much good research as they like, but shouldn’t expect to be paid for it. And as post-GFC markets continue to evolve, perhaps it signals we are looking to a time when no-one produces research — debt or equity — because the providers know that the marginal value of doing so might actually be negative.
Sandhya Chand | Managing Director at Peter Lee Associates
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