Some goods attract more demand as their price increases—think fashionably torn jeans. Or as their availability shrinks—like when only one discounted ticket is left. Investment banks seem to be betting on both when it comes to setting premium prices for their research. That may be a fair pitch, as new MiFID II rules push up barriers to entry and restrict supply. Banks will have to work harder to lure pickier clients, though.
Brokers and banks are grappling with the need to put a price on research and financial analysis that used to be more or less free—or rather, subsidized by the flow of trading commissions from clients, who got treated better the more they spent.
Europe's looming MiFID II rulebook wants investors and funds to set specific budgets for research, a valiant attempt at cutting the cord between trading and inducements to trade. As of 2018, you'll get what you paid for, not what you traded for.
The pricing models trickling out of banks, as reported by Bloomberg News, look confusing indeed, almost as if a five-star hotel were using a Ryanair fee table.
Barclays Plc is said to offer tiered memberships—bronze, silver and gold—that would run anywhere from 30,000 pounds ($39,600) for a pipeline of PDFs through to 350,000 pounds for a bundle of unlimited reports, field trips and one-on-one executive meetings. A Barclays spokesperson says 350,000 pounds is not the maximum price, and that the price range varies widely depending on the size of the customer. JPMorgan Chase & Co. is going lower with a $10,000 fee for entry-level research. And Morgan Stanley plans to charge about $2,500 an hour for private meetings with analysts—twice the rate of a corporate lawyer.
But don't dismiss blue-chip banks' ability to win business in this brave new world. While it seems crazy to be charging Tesla-level prices for an e-mailed report that could be out of date by the time it's opened, or a phone conversation that will be recorded and more likely to hinge on forecast earnings-per-share than insider gossip, there's both a scarcity and a prestige play.
MiFID II will probably shrink the overall availability of research, as barriers to entry rise, and squeeze out small brokerage shops. It's also likely that fund managers will tighten their belts to the tune of $1.5 billion to protect profits, according to Oliver Wyman research. That will benefit the brokers with the cash to spend on price wars, talent and cultivating corporate ties.
Besides, $2,500 per hour can itself be a great trade in an industry where annual asset-manager research budgets can run into the millions. If a fund has a $250,000 position in a stock, spending 1 percent of that on a conversation with an analyst would seem like good value if it led to an eventual performance gain of several percentage points, or helped avoid a loss. And in a world where firms have less money to spend, buying the research of a brand name counts when explaining investment decisions to clients—especially if your trades go wrong.
These points are all about setting a price on the door. They don't preclude negotiations. And anyway, it sometimes doesn't hurt to be seen as reassuringly exclusive.
Whether all this achieves MiFID II's overarching aims of safer and more transparent markets is another question entirely, though. Banks may still play favorites with clients, and fund managers may still over-spend or over-trade to get better treatment. But if it stems the flood of PDFs that sit unopened in fund manager inboxes, perhaps that's victory enough.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.