Understanding Research Unbundling and Why The GDPR Should Not Be Forgotten – Part 1
The first article in a two-part series, Johnson Oni outlines how MiFID II’s research unbundling mandates pose significant operational and tactical challenges to sellside institutions. Part 2, to be published next week, will explore how the process of becoming MiFID II research unbundling compliant may, in fact, breach the upcoming General Data Protection Regulation (GDPR).
The investment research business entered a new era on January 3rd as the Markets in Financial Instruments Directive (MiFID II) went into effect. The directive calls for the unbundling of investment research payments from any charges, fees or commissions that buyside clients may be subject to. For the first time, bank and broker-dealer equity research will operate as free-standing profit generators, transforming from absorbed functions to independent businesses driving their own P&L.
Investment research produced in the US and Europe has typically been paid for with client money in one of two ways:
- Dealing commissions calculated research payments for cash equities or listed equities derivatives as a percentage of a trading commission; or
- Bundling embedded payments into spreads or execution costs for fixed income and FX sellside brokers.
Research unbundling introduced by MiFID II, therefore, represents a major shift from historical practices, as the directive intends to curb inducements that could potentially generate bias and distort an investment firm’s decision-making in favour of the products and services of a particular provider that may not align with the client’s best interests. This article explores the impact research unbundling will have on sellside firms and how these firms can respond to these pressures in 2018.
Given MiFID II’s disruptive changes to research provision, GreySpark anticipates numerous strategic and operational challenges for the sellside.
- Research Pricing – As the buyside will now have to explicitly justify their choice of research and report its true value, pricing will be under closer scrutiny. The sellside can no longer produce large amounts of research, of which only a small percentage is of high value. Deciding how to accurately value research will be a major challenge, especially since the value that each individual customer derives depends on multiple, user-specific factors, which makes it difficult to measure and price objectively. Therefore value and price will vary according to the type of investment and the types of investment strategy pursued.
- Product Offering – Research providers will need to determine which content needs to be omitted or maintained within their product offerings. Tier I waterfront providers will likely have to narrow their sector and/ or geographic coverage, while Tier II providers will likely need to undertake a strategic rethink of their value propositions, which may even involve a complete exit from the provision of investment research. Costs and revenues per industry and sector will likely be a deciding factor when it comes to making these decisions. Further thought also will need to be given to the evolution of material given the demand for more tailored and differentiated insights.
- Client Retention – Maintaining existing client relationships will be a growing challenge for a more level research market. Sellside firms can no longer “bundle” their research as a part of a larger package, meaning that clients now have the power to shop around before deciding on a research provider. Independent research boutiques arguably will be the biggest winners from the unbundling provision as they will able to compete more directly with the sellside. Furthermore, the combination of cost-cutting and regulations is pushing many buyside groups to build their own in-house analysis teams; sellside research teams will need to prove to the buyside that their offerings are of unmatchable quality. 
- Client Categorisation – As the sellside can no longer produce a one-size-fits-all mass research proposition, a smarter, more robust client categorisation strategy is needed to effectively market research offerings and remain competitive. An immediate challenge will be the need to precisely categorise existing and prospective clients. Sellside firms will need to complete client analysis, where clients are grouped based on such factors as their different research needs, spending habits and frequency of use. This undertaking will allow sellside firms to create a structured and robust client prioritisation framework.
- Client Distribution & Coverage – Sellside firms will need to consider ways to optimise their distribution channels. Based on spending strategies, coverage models will need to be reviewed, which could see region-based coverage change to a sector-led coverage. The need for innovation in this area will be essential for ongoing success.
- Technology – Innovation in the research market, driven by the unbundling, could see the industry move from a push to a pull model of distribution whereby the supply of research is determined by demand from investment managers. Sellside research providers, therefore, must look to innovative technologies to ensure the efficient compilation and distribution of information and the use of cutting-edge tools to generate alpha insights. Technology can additionally foster the more efficient use of data, such as better client analytics that can be used to leverage client engagement.
- Operational Processes – New client onboarding and servicing processes will need to be established and successful. Commission and pricing management systems will also need to be revised and augmented to provide transparent and detailed reporting that displays the split and unbundled costs. These changes will be imperative to help provide proof that buyside firms have not been given inducements to trade with that particular sellside firm.
With MiFID II now live, the majority of sellside firms have implemented an effective research unbundling strategy. However, these firms need to consider the possible short- and long-term consequences of making these unbundling changes. In the second part of this article, GreySpark will explore the idea that becoming MiFID II research unbundling compliant may cause sellside firms to inadvertently breach the looming General Data Protection Regulation (GDPR).
 Greyspark Partners, 2016. Mastering MiFID II: Research Unbundling. London: GreySpark Partners. Available at: <http://research.greyspark.com/>
 Pollins, J., 2015. MiFID II, Research Unbundling, and What It Means for You. ITG [online]. Available at: <http://www.itg.com/marketing/ITG_CSA_FAQs_20150928.pdf>
 Quinlan and Associates, 2016. Research in an Unbundled World. [pdf] Hong Kong: Quinlan and Associates. Available at: <https://www.quinlanandassociates.com/wp-content/uploads/2016/09/Quinlan__Associates_Research_in_an_Unbundled_World.pdf>
 Wigglesworth, R, 2017. Final call for the research analyst?. FT.com [online]. Available at: <https://www.ft.com/content/85ee225a-ec4e-11e6-930f-061b01e23655>