Every analyst worth his salt will claim to her/his independence of opinion. The issue is that 95% of sell-side research is supplied by … conflicted organisations. What research providers lose on the provision of quality research nearly for free, they make up by charging commissions one way or another, circumventing the spirit of Midfid2. Quality research at $10 000 a year for a full coverage is akin to a loss leader sale that puts at risk the integrity of decision making by the subscribing money managers. It is an … inducement as there is no way the price can cover the cost.
The issue is so acute that the FCA has decided, a first for a European regulator, to carve out from Mifid2 regulation the research provided along a business model that fosters the integrity of markets:
‘From 1 March 2022, asset managers and research firms will be able to exercise the options on exempting the following from our inducement rules on research: research on SMEs below a market capitalisation of £200m, FICC research, research provided by research providers who do not provide execution services and are not part of a group that includes a firm offering execution services and openly available research’.
It is a first as it highlights that, by default, all research that is attached directly or indirectly to execution is conflicted and, indeed, needs Mifid2 regulation to keep a check on it.
Independence is not simply a mindset
The FCA’s say matters for AlphaValue and its peers whose business model has always been to provide unconflicted research as it is solely sold on a subscription basis. As all brokers will abuse the word ‘independent’ when pushing their production of ideas, the FCA move is in effect telling market participants that market integrity lies with non-conflicted business models.
A very robust and practical definition of genuine independence is thus minted. It helps the whole industry, buy-side and sell-side alike. It is also a timely move when investment processes themselves are expected to be ESG compliant, i.e. rely on the tools that defend the best interests of savers in the spirit of what the G of ESG mandates imply.
Research providers falling under the FCA definitions are naturally aligned with that most essential obligation. They are called IRPs for Independent Research Providers and grouped under the Euro IRP industry association.
IRPs’ subscription-based offers will help protect price formation (no volume inducement) and help avoid conflicts of interest since they have only one client, the buy-side community. Other regulators will hopefully agree with the FCA’s opinion.
Alignment of interests as a business model
Ten years down the road of independent research, AlphaValue is pleased to be the only pan-European big cap research provider facing the non-independent bulge brackets, i.e. having a genuinely non-conflicted view on c. 450 European large caps.
AlphaValue has striven to build open and direct relationships with major issuers while maintaining its independence (strictly no business with corporates covered as part of subscription research). Year after year, AlphaValue’s analysts have succeeded in engaging in constructive discussions with most corporates while not yielding on principles.
AlphaValue also reckons to be a forerunner in unconflicted ESG/sustainability research. Its reading of ESG matters is entirely proprietary and completely plugged into its equity and credit research with live ESG impacting its target prices. This can only be achieved with the hard work of its 31 analysts, proprietary financial and non-financial data that help defend its independence, and a fully proprietary technology that turns its website into a unique ‘meta-research’ tool.
The FCA regulatory changes also imply that, as with its independent peers, AlphaValue can be trialled at any time, free from any Mifid2 constraints.
For AlphaValue, by Pierre -Yves Gauthier