Banks and Clients Tussle Over What It Will Cost to Read Analysts

  • JPMorgan, Deutsche Bank mull pricing as free research era ends
  • ‘Pay as you go’ phone-style plans mulled as MiFID II comes in

Just months before banks stop giving trading clients market research for free, they’re still locked in discussions about how much to charge.

As a European ban on bundling research with brokerage services looms, banks are sounding out asset managers and hedge funds on what they’d be prepared to pay. Money managers say they’re getting quoted $50,000 for a basic package from JPMorgan Chase & Co.’s fixed-income analysts. But no firm is allowing itself to be pinned down quite yet.

Deutsche Bank AG and Commerzbank AG are pitching a metered, “pay as you go” approach for smaller investors less able to swallow large, up-front subscriptions, according to three people, who asked not to be identified as pricing discussions are commercially sensitive. For the largest hedge funds, all-inclusive packages are on offer, with perks such as VIP analyst access, conference discounts and unlimited research notes.

“We are still waiting for banks to say definitively how much and what you get for certain prices,” said Richard Benson, a London-based managing director and co-head of portfolio investment at Millennium Global Investments Ltd., which oversees $14 billion. Quotes “range from very low to the hundreds of thousands, but I doubt we’ll have clarity this side of the summer break.” He declined to comment on pricing from specific institutions.

Cost Scrutiny

Charge too little and regulators might accuse you of gaming the system, while getting the pricing wrong could alienate key customers and drive their trading business elsewhere. The squeeze in margins has been so severe in stock and bond dealing that it’s already led to the loss of about 11,500 sales, trading and research jobs over the past six years, according to data from Coalition Development Ltd. Active asset managers, in their struggle to compete against cheaper passive strategies, are paring back on costs including research.

The European Union’s MiFID II regulations, enforced from Jan. 3, aim to tackle conflicts of interest by requiring asset managers to separate the trading commissions they pay from investment-research fees. Regulators are concerned investors that generate huge commissions may route business to traders at their favorite analysts’ firms in exchange for privileged access to the best ideas, even if they aren’t getting the best deal for their funds’ clients. The U.K. Financial Conduct Authority and the European Securities and Markets Authority also say a lack of transparency means investors can overspend on research with impunity.

MiFID’s Mission to Renew Trust in Markets Irks Banks: QuickTake

Integrity Research, a U.S. consultancy, estimates investment banks currently effectively charge clients $75,000 a year on average for access to their analysts’ publications, based on its own extrapolations from banks’ pricing systems and a poll of about 70 firms. Among boutique research-only houses, U.S.-based MoffettNathanson LLC, which focuses on telecom and media, commands annual subscriptions of $100,000, and more for phone access to analysts, according to three people with knowledge of its pricing structure.

That’s the kind of expense investors may balk at paying. The introduction of MiFID-related fees means asset managers in Europe and the U.S. will cut more than $300 million in spending on external research, consulting firm Greenwich Associates estimated in a recent survey.

“MiFID 2 is supposed to level the playing field and help the smaller investors, but it’s having the opposite effect, because we can’t afford to pay as much as the larger firms," said Mark Holman, chief executive officer at TwentyFour Asset Management LLP in London, which oversees about 5 billion pounds ($6.4 billion) of fixed-income assets.

U.S. Divergence

The situation is unique to Europe, as the U.S. has no plans to introduce a similar fee-based system. This could lead to firms moving some operations across the Atlantic in order to circumvent the EU rules, some traders and investors have said.

A spokesman for the U.K. FCA said the agency hasn’t put any guidance out on pricing research, nor has ESMA. Banks’ research teams and large investors in talks with these regulators concur, saying they’ve received no indication of acceptable prices.

Given the wide divergence of preliminary quotes, money managers are finding it difficult to budget for next year, one manager at a hedge fund said. This person has been pitched prices for equity research ranging from $50,000 a year to more than $100,000.

German Banks

Among the differing approaches to pricing, Deutsche Bank has long had a monitoring system tracking how many people from a client firm are logging in and how much they are reading. As it refines this system, the bank is coming up with a base user charge and is meeting clients to hammer out pricing. One medium-sized London-based investor said they were quoted 60,000 euros ($64,400) for a year’s entry-level fixed-income services from the German lender, but was told this price is not set in stone. Most clients will pay more than this, according to a separate person familiar with the bank’s strategy.

Commerzbank isn’t proposing a price yet, but is outlining what a tiered system might look like, according to marketing documents seen by Bloomberg News. Fixed-income, currency, commodity and macro subscriptions will come in “pay as you go,” “select” and “all-in” levels, the document shows. The select option allows clients to pay for specific asset classes, such as emerging markets; the “all-in” option charges a flat fee for unlimited research as well as access to any analyst.

For equity research, the German lender will introduce silver, gold and platinum memberships with language similar to mobile-phone contracts, describing them as, respectively, pay-as-you-go, prepaid-card and flat-rate, the presentation shows. Platinum includes “VIP” and analyst access, and discounts on conferences and the bank’s measure of its time spent on clients, known as “research service units.”

Almost all banks are stressing they’d prefer to continue charging nothing and are leaving all fees open to negotiation, while keeping a close eye on their competitors, investors say.

JPMorgan

JPMorgan, the biggest U.S. bank, has been floating $50,000 for a basic fixed-income research option, with prices increasing for more tailored packages and better access to analysts, according to two people who spoke in condition of anonymity. Both banks have stressed prices are yet to be finalized.

One senior manager at one of the largest European asset managers said JPMorgan’s move to price at the cheaper end of the scale was an attempt to win market share from rivals. The executive said the big investment banks were pricing fixed-income research packages around $250,000, but one European bank had proposed charging nothing for two years as an introductory offer, only to be batted down by EU regulators. Another asset manager has been quoted about $600,000 for credit research.

JPMorgan, Commerzbank and Deutsche Bank spokesmen declined to comment.

Firms pitching lower prices include Berenberg, the Hamburg-based broker traditionally known for its research. Managers there have been asking their fixed-income clients what they think of paying about 20,000 euros a year, one of the people said. "All the banks are speaking to clients about MiFID at the moment," Berenberg spokesman Karsten Wehmeier said. "We can’t comment on any figures."

Ben Kumar of Seven Investment Management lamented the end of free analysis, saying it was useful to compare the big banks’ take on a company with the boutique research his firm paid for.

“Access on demand is great,” said Kumar, a London-based money manager whose firm oversees about 10 billion pounds. “I might not need it one month, then spend the next devouring whatever I can find on Vietnam as an investment opportunity. It’s tough for a bank to price that.”

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