Is Independent Research Dead?
As the owner of a business that makes its living selling independent research, there are many times that I wake up in the middle of the night in a cold sweat. It only takes one or two cancellations from buy-side clients to get my mind racing: “The research market is shrinking. MiFID II means the end of independent research. Clients don’t have a budget for independent research any more. We are going to be left behind and our business is going to close.”
But then I think of a conversation I had recently with a client and friend who is a buy-side fund manager running over 1 B in AUM. “As a research firm, if you bring me what I need and want, I will always find a way to pay you. MiFID doesn’t matter, budgets don’t matter, research competition doesn’t matter – bring me what I need, and I will find a way to get you paid.”
The conviction in the way he said this to me does provide me some comfort. But it also leaves a big question: What does the buy-side need and want?
What is the market for financial research?
According to a recent article on Reuters, the global market for financial research is USD 9.3 Billion/year. While figures for independent research are harder to measure, at best, IRPs have 10% of this market – and it is probably much less than that. Most independent research firms have revenues in the low 10s of millions – or even less – so the opportunity for growth in a 10B dollar market is massive.
These numbers are cause for optimism amongst IRPs: even if the global research market were to shrink by 50%, there is still a huge opportunity for independents to grow dramatically and take market share from the sell-side.
But they must position their business properly if they wish to capture this market share. And unfortunately, most IRPs are languishing, with year-over-year revenues rarely increasing and often declining.
Who is our competition?
Unquestionably, the main competition for IRPs is the sell-side. Buy-side analysts only have a certain amount of bandwidth to consume research, and the sell-side does a fantastic job churning out huge volumes of reports on a monthly, weekly and even daily basis, creating so much analysis and data as to drown out the competition.
On top of this, large sell-side banks invest big bucks in their sales and marketing teams, and they will do whatever it takes to stay close to the buy-side clients. A bank may have more sales people than analysts, and they understand how to leverage their analysis with top institutional sales people to get their product to the top of their clients’ desks. Institutional salespeople are paid high six-figure salaries to understand the research, and to deliver the best ideas to their key buy-side clients.
On the marketing front, sell-side investment banks are brand names that are known not only in the investment community, but also by the general market. The influence of these brands are powerful: when a “Goldman Sachs” changes a rating on a stock, it can move the market – even if the analyst is not known, or the report is not even read. Banks understand the importance branding, and they invest millions to ensure that the influence of their brand remains high.
The problem with the independent research community as a whole, is that we use very little of the strategies and techniques that the sell-side has proven so successful for capturing, growing and maintaining their market share. On the whole, the quality of the research of independents is superior. We don’t have all the distractions tormenting sell-side analysts, allowing us to focus on better, more effective financial analysis and financial forecasting. But we have not done the same on the business development front.
Budgets may have shrunk, but the opportunity remains huge. In upcoming letters, we will examine topics such as what IRPs can do to increase market share, boost lead generation, and sell to different market segments.
May your sales team ‘Always Be Closing’!
This blog post was also featured on the Integrity Research Blog