Sell-side Research has had some very trying times in the past few years. And it’s not over yet. Unbundling brokerage services (trade execution) from research services has not only compressed research fees, it has also raised important questions like “What is this research really worth?” There seems to be no easy way to measure the value of research. So how does one price the service?
Expertise, which is what a sell-side firm has to offer, is sold in many other industries. There are primarily two pricing models that are common. Law firms and management consulting firms like McKinsey price their services by time. Technology research firms like Gartner sell their research through subscription based pricing models. There are other models of course (investment banks price their services as a % of the transaction value) but these are the two primary ones.
Michael Mayhew of Integrity Research Associates in a post Changing Value in Investment Research, quotes a Greenwich Associates study on Research Commission Allocation by buy-side investors. The study looks at the value buy-side puts on various Value Components of the research services they buy from sell-side firms. The data from 2005 to 2007 does not show any clear trends, except for the commission allocation towards company and industry research reports, which has dropped from 14% to 10%.
While the trends were not very clear, the table was interesting in that someone (Greenwich Associates) had put together a MECE list of the components of value in research services. Just for fun, I took each Value Component in the table and asked this question – if this was a stand-alone service, which industry or business would it resemble most? Here’s what I came up with:
*Sales is really distribution and not a stand-alone product or service.
Let’s first talk about Research Conferences and Management Access. Management Access is not about expertise. Michael Mayhew says
…the buy-side’s reliance on sell-side firms for access to company management seems to us to be rather suspect part of the value proposition of their research offering. Not only is it unclear how one can argue that management access is actually research, but it is also surprising that large buy-side firms continue to pay for a “concierge service”. Large buy-side firms should be able to get access to most company management teams they want to meet, thereby eliminating the need to pay so much to the sell-side to arrange these meetings.
Organizing conferences is what an Events company does. Many leading trade publications hold conferences. It requires very little expertise to organize conferences. On Wall Street it is this way because Research Conferences are another aspect of Management Access which buy-side has traditionally depended upon the sell-side to help them with. So Management Access and Research Conferences are the ‘odd ducks’ amongst all the Value Components – they are not ‘research’. However, since the buy-side (and corporates) find value in it, especially in Research Conferences, they will continue to depend upon the sell-side for it.
The rest of the Value Components squarely fit into either a ‘professional service’ model, which is largely priced by time. Or into a ‘research product’ model, like Gartner or say a newsletter like Release 2.0, which is largely subscription priced. I say ‘largely’ because everyone ends up doing a little bit of both. McKinsey publishes McKinsey Quarterly which has a modest subscription fee and Gartner has a healthy consulting business.
If sell-side were to abandon its current pricing model which is still modeled as cents per share, which way might it go? Michael Mayhew in the same article says
…the buy-side is relying less and less on reading an analyst’s research, and more and more on speaking directly to analysts who have developed trust, credibility, and unique industry expertise. This enables the PM, buy-side analyst, or hedge fund manager to brainstorm with analysts, deriving direct answers to their questions and generating unique investment ideas that may not be covered in a public research report.
This interaction sounds very much like one with a top corporate lawyer or a partner at a management consulting firm. Could this then be the future pricing model for research – research reports become restricted circulation marketing ‘expense’, while the analyst’s time is what is valued and priced?
We’ll just have to wait and see.