The Independent Research Industry in Europe is a fast growing part of the investing world.
Member firms specializing in providing investment research to the fund management industry are independent because they are free of the potential conflicts of interest present in the main engine of investment research namely the investment banking industry.
The fallout from the tech bubble, the resulting Spitzer investigation in the US, the Myners Report on the responsibilities of institutional investors in the UK, and now the new MiFID II regulation in Europe have focused attention on the need for unbiased investment research and the role which independent providers can play.
The independent research sector is growing. A large number of IR firms have been set up in the USA and Europe covering most large industry sectors and many geographies. The industry is also populated by firms covering macroeconomics and political risk analysis. More recently a nascent industry has been emerging in Asia.
Historically, research was perceived as ‘free’, i.e. bundled with execution services by the investment banks. Not only did this give rise to the recognised conflicts of interest, but it made it extremely difficult for independent research providers to compete, since they had to recover the costs of their activities while the research divisions of banks could, and did, cross-subsidise their research from other activities.
In the US, the global settlement negotiated by Elliott Spitzer included provisions to subsidise for a limited period the development of independent research.
The UK has given more emphasis to seeking a market solution by establishing a level playing field and the regulation from the European Commission in the form of MiFID II in particular directs this changing world. In the lead up to January 2017, when MiFID II comes into force, asset managers are already re-designing their internal processes to value and pay for research as no longer will investment banks be able to bundle payments for research with payments for execution.
This changing landscape provides both opportunities and potentially threats for the growing independent sector.
The European Association of Independent Research Providers is here to work on behalf of our members at this exciting but challenging time for the industry.