Pay Check

$10,000 Phone Calls Are Doomed

The good news is that the cost of research stands to become clearer. That's the bad news, too.

The idea of paying $10,000 for a single phone call with one analyst sounds outrageous, but beyond the headline exorbitance is the real question of how much financial research is worth.

It has been tremendously difficult for banks to put a price tag on their research. After all, it's rarely easy to put hard, fast numbers on the direct profitability of such ideas and information. What if that $10,000 phone call helped an investor earn $1 billion? Or even $1 million? Then it would be considered cheap.

Investment managers have traditionally paid for research as part of their relationships with banks, obscuring the need to put a hard figure on this fuzzy field. But that's about to change, and quickly, because at the beginning of next year, European banks will start charging asset managers specifically for research, as prescribed by the second Markets in Financial Instruments Directive.

Under this rule, big investors such as BlackRock, State Street and AllianceBernstein will need to pay for research through profit-and-loss or payment accounts, according to Bloomberg Intelligence's Sarah Jane Mahmud and Ben Elliott. These firms will most likely end up producing even more of their own research rather than pay an additional fee to big banks. Some independent research providers, including Autonomous, Morningstar, Markit and Edison Investment Research, stand to gain market share in this environment, the Bloomberg Intelligence analysts noted. 1

Swelling Ranks

Many expect the number of research providers to increase in the wake of new rules

Source: Survey taken on May 26, 2016 at Bloomberg event

Financial firms are bandying about prices and packages, with some banks proposing $10 million a year for complete access to research or up to $10,000 for a phone call with a top analyst, according to the Financial Times. Global banks may likely follow these rules even outside of Europe as a way to simplify their compliance efforts.

That will bring the cost of research into stark relief. And this probably will bring some bad news for the ranks of big bank research teams, which have already declined by about 10 percent in the four years after 2012, according to Coalition data cited by the Financial Times.

These new rules will most likely accelerate these cuts because asset managers are in no mood to shell out for research. Their fees are rapidly shrinking, and they're merging with one another to lower costs. With asset managers being forced to justify every expense, no one is going to want to explain that $10,000 phone call. It's more likely that these investment firms will err on the side of cutting research rather than risk paying too much for it. In fact, almost 70 percent of respondents to a 2016 Bloomberg survey expect firms to reduce their research expenses in coming years.

Downward Pressure

Firms are generally expected to pay less for research in coming years

Source: Bloomberg "Spotlight on Independent Research," Jan. 27, 2016

This directive won't likely result in JPMorgan, Bank of America or Citigroup exiting the business of research entirely. These firms can subsidize these units from other revenues, making them more competitively priced. Smaller banks, however, may be forced to either close or merge such units.

Meanwhile, it's going to be costly for both banks and asset managers to carry out these new rules, further cutting into near-term budgets to pay for new ideas. 

So hard decisions are coming for both banks and asset managers. Banks will have to decide how to price their research so that they have customers, while asset managers will need to decide how much they can reasonably spend for that idea that gives them an edge. This market-driven approach could finally deliver some much-needed clarity. It probably won't involve many five-figure phone calls.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Bloomberg LP, the parent of Bloomberg Gadfly, provides research through Bloomberg Intelligence. 

To contact the author of this story:
Lisa Abramowicz in New York at

To contact the editor responsible for this story:
Daniel Niemi at

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