What are the four most important factors influencing your choice of an investment bank for a product or service?
Price is an inevitable response, reflecting among other things a fund manager’s fiduciary duty to shareholders and investors. The second-most common response of ‘Research provided’ is more interesting. Research continues to be one of the most visible ways in which an investment bank makes an impression in the wider market, although as we shall see later, it is not necessarily a service for which many clients are willing to pay a premium. Banks have pared down their research departments over the past few years in response to three broad trends: changes to regulation and how research analysts can work; consumer preferences for products that are ‘research light’, such as ETFs; and the drop in margins of established products such as cash equities. Overall, front office staff in investment banks in New York and London have fallen by some 12% since the peak in 2007, a cull that research has not escaped. Next, we asked asset manager respondents to indicate which services they would be willing to pay a premium to receive, and which services they saw as an integral part of a basic offering.
As part of our industry research program, Accenture asked the polling firm YouGov to conduct a survey of the clients of investment banks: fund managers and corporate treasury departments. This report looks at how clients value research that is produced by investment banks. Other reports examine survey findings ranging from attitudes to social media, to client risk management, to electronic trading, and more. While this report gives an overview of the responses to the survey, there are areas of detail we have not found it practical to include.
After a nearly five-year period, during which the S&P index has almost doubled, and with historically low volatility, asset managers might be forgiven if they started to deem research as less critical. In addition, increased index trading, passive investing (e.g., ETFs), and algorithmic trading have supported the diminishment of the value of high-touch, traditional research. A simultaneous fall in trading commissions from $13.9bn in 2009 to $9.3bn in 2013 in North America, and from €4.2bn to €3.0bn in Europe over the same period (research by Greenwich Associates), has led to investment banks pruning their global research teams in key markets. Smaller sell-side research budgets have led to smaller research teams providing similar coverage (with reduced frequency of published reports), or focusing research on selected names, sectors most likely to generate business, or where trading volumes are particularly high. Does this mean that research has lost its shine, and are the sell-side industry budget cuts appropriate to the market reality? Our survey found that research is still a valuable service to most asset managers and buy-side participants. However, respondents expect to receive written research as a core service from their investment bank, and would hesitate to pay a premium even for valuedifferentiating service. We explore this aspect in some detail in the following sections.
What services do you use?
Unsurprisingly our survey found that overall equity trading is the most frequently used investment bank service by asset managers. However, research is a close second. Even for non-financial corporates, the rankings are similar. Our survey found that while buy-side clients can maintain up to 90 separate relationships with sales and trading desks at various investment banks, they receive research reports regularly from as few as eight banks. This points to portfolio managers’ limited bandwidth for reading sell-side research, and helps explain the skewing of commissions to the most-valued providers. In essence, fund managers are more selective when using an investment bank for its research services than for its sales and trading capabilities.
The model used by investment bank clients has long been to compensate the banks whose services and content they most value with trading and other business. There is clearly a difference between ‘use,’ ‘value highly’, and be ‘willing to pay a premium to receive’. So which services do clients value sufficiently that they are willing to pay extra to receive them? Consider first, the most important factors in choosing an investment bank.