How to Rebuild Research

To continue with this cycle on equity research (here and here and here) we thought we would try to imagine a new model for research.

First, we have to differentiate the two approaches to research – Analysts as a marketer for some other service and Analysts as paid content provider. Today, the equity research model is essentially run as a marketing function for the trading platforms of the brokers who employ them. In many regards, this is an efficient model, just like McDonald’s bundles fries and a drink with their hamburgers. Customers spend more than they originally planned, but get more value from the transaction. Unfortunately, ‘bundling’ is one of those words your lawyers tell you to avoid in case the regulators come looking. Which is exactly what happened in Europe with the MiFID II rules that un-bundle research and trading. To torture that McDonald’s metaphor further, EU regulators see this bundling as akin to when someone asks you to buy a hamburger, and you come back with the whole Meal Deal, and no change for that $10 bill.

The other model is asking people to explicitly pay for research. Set aside the loss aversion of the transition to a paid model, it is pretty clear that professional investors do not really want to spend too much on research. Perhaps, more precisely, we should say that a paid model opens up a big Discovery problem. How do investors find which analysts to pay? How do analysts find clients interested in their domain without someone violating the client’s confidentiality?

If all of this sounds like an Internet business model question, that is because it is.

We have been saying for years that the idea that Securities Research is somehow the only content business to not get disrupted by the Internet is the height of folly. Go read Ben Thompson’s Stratechery for a good insight into Platform versus Aggregation models of the tech giants. That analysis holds here.

In the past few weeks, we spoke to a few fund managers who all acknowledged that they are willing to spend a lot of money on research. One manager calculated that the average investor spends $250,000 a year on research. So this can be a big market. But at the same time, they struggle to find the right analysts to speak with. Having been on the other side of that problem we know that a lot of fund managers end up path dependent on analysts they know personally. It is not quite an Echo Chamber, but in the absence of a real discovery mechanism people are going to favor their friends.

So what would a better model look like?

The basic answer is that there needs to be a “Platform” for research. This would take research from all sources, anyone could sign up to provide content. The platform would then reach out to sign up investors, and provide subscription services. Building a two-side marketplace like this is by now a straightforward technical problem. More complicated will be the cultural and governance model. For instance, the platform would need to tier the content, with “Premium” or “Gold-Star” analysts differentiated from anonymous bots talking their own book.

The benefits for investors would be meaningful. Having a simple search engine that can actually find good analysts would be much easier than today’s model of logging into 20 different Research Portals for every broker. A few companies, notably Thomson, already provide this, but these address a different problem, and tend to overwhelm users with too much information.

The benefits for Analysts would be even greater. Today, independent analysts really struggle to gain attention. They have to compete with the brokers’ salesforce who generate an immense amount of amplification for the analysts on their desks at the cost of quantity research driving out quality research. Having a platform that connects analysts and amplifies their voices allows for a much broader diversity for independent analysts. Today, independent analysts have to constantly balance the need to find new clients against the need to actually create valuable research. A Research Platform would greatly alleviate this burden.

Of course, there would be some serious risks to moving to this model. Analysts will have to contend with the worry that any platform would seek to extract all the value from the model. Given the state of consumer-facing platforms today, there is the risk that clickbait research could end up replicating the quantity-over-quality problem we already face.  No one wants to end up with the YouTube of Research where the monetization model is a Black Box, constantly being tweaked to the aggravation of content creators.

That being said, a well-built platform could find a way to balance its own business needs without treading on its content providers.  They would need a small team of salespeople to promote the service and convert investors to paying customers. They would also need a small group of Community Managers, or Editors, to curate the research coming in and provide that tiering we discussed above. Likely, the platform would have to set rules for how research subscriptions would work, and monetize through a revenue share with the analyst pool. They could also tack on calling and scheduling services, to help analysts arrange investor meetings and corporate access road shows.

We have been toying with this idea for many years, and there are some signs that someone is starting to build on this.

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