From a non-descript office in south London, Mark Hiley may be showing the way for Wall Street giants such as JPMorgan and Merrill Lynch to adapt to new European rules requiring them to charge an explicit fee for investment research.
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Unlike the big banks, boutique firms like Hiley's The Analyst do not offer trading or corporate finance. They rely entirely on what they charge for research, as will be required under the European Union's MiFID II directive by January 2018.
"The business idea came from the fact that no one uses the sell-side (research) on the buy-side and they certainly don't use it in the right way," Hiley, 36, told Reuters.
The relationship between the sell-side, the investment banks, and the buy-side, the fund managers, has involved the cost of research being bundled into trading commissions that banks charge for buying or selling shares.
But under MiFID II the buy-side is forced to cast a critical eye over what research it will pay for, which could mean cuts in the number of analysts employed by investment banks.
Andrew Formica, chief executive of Henderson Global Investors, which has $125 billion of assets under management, said it was increasingly focused on quality.
"It's (MiFID II) certainly made us more discerning. Banks put out a lot of research, and not all of it's very good and not all of it's necessary," Formica told Reuters.
A survey of fund managers by consultancy Quinlan & Associates last year concluded that analyst headcount at banks will fall by 30 percent by 2020.
Fund management firms are also under pressure to improve transparency over research payments. Jupiter Fund Management said last week it would stop charging clients for research it buys from banks, joining Woodford Investment Management, M&G and Baillie Gifford who have already announced similar measures.
GOLD, SILVER, BRONZE ... PLATINUM NEXT?
After a decade at fund management firms, including Fidelity, Hiley was frustrated by the quality of investment banking research and founded The Analyst in 2010. It covers a small number of stocks, similar to Autonymous, which only covers banks and financial services, and technology specialist Arete.
Although sell-side research analysts facilitate company visits, management meetings and conferences, which are often valued by fund managers, critics such as Hiley argue they have an incentive not to criticize companies to secure business.
"The sell-side is incentivised to be nice to companies. (It is) very short term, everyone is doing the same stuff," he said.
And with only 10 months to go before the MiFID II deadline, banks have yet to disclose how they will charge for research.
Citigroup , Goldman Sachs , JP Morgan and Morgan Stanley declined to comment, while Bank of America did not respond to requests for comment.
"There will be winners and losers. Some firms are talking about very interesting and innovative models in the light of the MiFID Research and Inducements provisions," Julian Allen-Ellis, Director of MiFID at AFME, a lobby group for the financial services industry, told Reuters.
"What is today a sell side cost center could turn into a profit center for those firms that adapt most successfully to the new regime," he said, adding that there was still much to be clarified in MiFID II.
Meanwhile, The Analyst offers Gold, Silver and Bronze services. While Bronze provides access to the research portal, Gold allows weekly calls with analysts, at 10 times the price.
The Independent Research Foundation, which sells boutique research, says access to independent research starts at $3,000 per year for a one-person macroeconomic newsletter and rises to around $250,000 per year for unlimited access to a team of equity analysts. Its average price is around $60,000 per year.
"You could see the emergence of so called "ultra platinum services" whereby access to face-time with top analysts, bespoke research content, bespoke signals data for your algorithms consumption and other elements make up a sophisticated product offering. There are many potential ways to monetise research and firms are sure to be very competitive and pioneering with their offerings," AFME's Allen-Ellis said.
BUY, SELL OR HOLD?
MiFID II is also likely to shake-up the cautious attitude to ratings taken by many equity analysts, who rate a stock "buy", "hold" or "sell" to indicate their views to clients.
But the majority of ratings are "buy" or "hold", Thomson Reuters data shows, with just three FTSE-100 stocks rated as a "sell" on average by the analysts covering them.��
While Hiley and other boutique firms do not offer the same breadth of research coverage, he encourages his team of seven analysts to work on a small number of ideas per year, often recommending "sell" ratings that run against consensus.
The Analyst has ratings on around 40 stocks, all "buy" or "sell". That is around a tenth of the size of an investment bank's coverage but comes at a tenth of the cost, Hiley said.
An analyst at a bank is usually responsible for a single sector, meaning it will traditionally require dozens of employees to cover European companies. And with dozens of banks covering each stock, it means duplication.
Rather than desk-based financial modeling, Hiley sends his analysts out to visit stores and test products.
The Analyst was among the first to flag issues at Gowex, a Spanish tech firm it later emerged was faking revenues.
"The sell-side and fund managers hadn't done any on-the ground work," Hiley said. "They don't have the time."
Some fund managers are taking a similar approach.
Stewart Investors invites banks, consultancies and even individuals to bid to conduct bespoke research on its behalf.
"We found we were often struggling to get brokers to adequately research the long-term non-financial issues that are so crucial to our evaluation of investment opportunities and risks," the Scottish fund management firm said on its website.
(Additional reporting by Simon Jessop; Editing by Alexander Smith)