$10,000 for a single phone call with a bank analyst
Asset managers and lenders in fierce negotiations over cost of investment research
Asset managers and banks are locked in fierce negotiations over how much fund companies should pay for investment research, with some lenders demanding $10,000 for a single phone call with their most senior analysts.
Banks have put forward quotes of as much as $10m a year to provide fund companies with complete access to their research, according to several asset managers and consultants that are involved in the negotiations.
Fund managers who want additional services, such as face to face meetings with analysts or invitations to events with companies, are being asked to pay more on top of the annual subscription fee to access banks’ research platforms.
A research expert at a large European asset manager, speaking on condition of anonymity, said his company had been asked to pay “mid single-digit millions” of dollars annually to access some banks’ research platforms.
He described the negotiations as a “phoney war” between sellside analysts and their asset management clients, with both sides waiting for the other to concede on price.
“The figures are all over the place at the moment. Some [quotes] are fair and reasonable, and [with others] we thought: there is no way we are paying that — they will have to recalibrate their business models or part ways with us altogether.”
The tense discussions over how much analyst research is worth have intensified since the start of the year as the investment industry readies itself for the introduction of new European rules, known as Mifid II, in 2018.
The rules will force fund companies to explain clearly to investors how much of their money is spent on research. Previously research was sent to fund managers for free in return for the business asset managers provided to banks and brokerages when they placed trades. The cost of the research was included in the price of trading.
The head of a boutique fund company, which has a yearly research budget of £1.1m, said brokers were now asking for $300,000 for an annual subscription to their research. “As a global house covering emerging and global markets, you might need a dozen brokers. That’s a huge bill,” he said.
“For smaller managers this is a big problem. They just don’t have the scale to put a cheque of that size through. We had one broker say it might be $500,000 [to access their research annually], but that’s a nonsense starting negotiation position.”
Brijesh Malkan, a former Legal & General fund manager and senior consultant at BCA Research, an independent research provider, said some of his clients have been asked to pay up to $10,000 for phone calls with top bank analysts.
Banks have also requested a $30,000 annual fee to provide an individual with access to their research platforms, and up to $10m to provide a fund company with the same level of access across its workforce, according to Mr Malkan, who has more than 2,200 fund management clients.
The new European rules have made fund managers question the true value of the vast quantity of broker notes and analyst reports they have received for free for decades. Many investment houses have already made drastic cuts to their external research spend.
Henderson, the FTSE 250 asset manager, has cut its external research spend by 50 per cent over the past three years.
Schroders, the UK’s largest listed fund company, said: “Our spend on external research has reduced substantially over the past five years and we continue to reduce the external research budgets.”
Globally asset managers are forecast to reduce their external research budgets by a third, although the cuts are likely to be much deeper in Europe. This is expected to force banks to make heavy cuts to their analyst workforce, although some lenders are fighting back in an attempt to protect their research departments.
Benjamin Quinlan, chief executive of Quinlan & Associates, the consultancy, and former head of Asia-Pacific equities strategy at Deutsche Bank, said some banks were adopting a “bait and hook” strategy: offering a lower annual subscription rate of around $300,000, in the expectation of raising the fee once asset managers are signed up.
The prices being put to asset managers are varied and very flexible at this stage, and often depend on the size of the fund company and the amount of trades they place with the bank, according to Mr Quinlan.
“This is the biggest problem,” he said. “It will cause a lot of problems in 2018 because no one has worked out how much the research is worth.
“There will be a lot of c**p that clients won’t pay for and that is when the big cuts [to the analyst workforce] at the global banks will come. The feedback from many [in asset management] is that the price of research is too high and not granular enough.”