CAPITAL MARKETS

Investment Banks: A Client’s View - Volume 2Making Research Count

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Executive Summary

Methodology

Accenture, working with the polling firm YouGov, has conducted a survey of fund managers and corporate executives to gauge their views on a range of services offered by investment banks. Which services are of greatest value? Which services are seen as a natural part of any offering? Which additional services are clients willing to pay the most to receive? These and other questions were put to 100 respondents across the United States and the United Kingdom. Here is the analysis of some of our findings:

• Research was the second most important factor influencing clients’ choice of an investment bank; only price was more important.

• Clients have a view as to what should be a core, basic service; written research is part of this core service.

• Beyond basic research, there is a hierarchy of value, with access to analysts being particularly valued.

• General industry thematic research, particularly with commercial insights, is often more valued than specific, company-focused research.

• High touch communications matter: most valued is either one-to-one time with analysts or telephone calls; emailing research is the least valued form of communication.

• For investment banks’ research areas, this points to a number of ways to drive value:

- Identify and track firm-wide interactions with top clients.

- Take top clients ‘up the value curve’ in terms of the research offering, focusing on the clients who will pay more for content and the specific research content they value most.

- Establish a depth of knowledge that enables premium pricing.

- Expand research into areas where demand is still growing rapidly, but coverage remains low.

- Develop a research operating model where low-cost centers help with simple analytics.

This survey was conducted in July and August 2013 through telephone interviews with senior users of investment banking services: fund managers, asset managers, pension funds, hedge funds, and non-financial corporations. A total of 100 respondents were interviewed, 50 in the UK and 50 in the US, equally divided between fund managers and non-financial corporates. The responding samples are not weighted in any way.

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Investment banks: A clients’ viewAs 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.

Value of research – losing its shine?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 value-differentiating 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.

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What investment banking services does your organization use?

Which services do you value? 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.

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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.

Research provided

Ability to tailor appropriate financial options

Trading/execution capabilities

Willingness to finance

Lack of any conflicts of interest

Existing relationship with individuals/bank

Deal execution abilities

Market expertise/knowledge of product or service

Market reputation for this sort of deal

Wide range of service o�erings (one stop shop)

Price

Expertise in a designated region Asset/Fund manager

Corporate

Source: YouGov, Accenture Research

24%

26%

26%

38%

18%

34%

16%

22%

32%

40%

46%

62%

14%

16%

22%

22%

24%

26%

26%

30%

42%

48%

58%

68%

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To what extent do you as a fund manager believe there is value in paying a premium for the following services?

Services that aid or enable better risk management are the most valued offerings, and clients are willing to pay a premium to receive better services. This is followed by a group of services having to do with front-office trading functions, including best price, speed of trading, trading advice, and trade timing. Research

services of various types fall below these, albeit with significant portions of respondents willing to pay “a small premium for better service.”

Investment banks have long realized that providing a certain set of services, consistently and accurately, was a

requirement to compete, but that other value-added services could be used to differentiate from competitors. Our survey confirmed that clients do simply expect a basic package of research services, but do not necessarily value them more than basic trading services when it comes to differentiating investment banks.

Risk management services

Ability to trade rapidly (rapidly complete trades)

Ability to trade at best price

Trading advice – when to trade

Post trade analytics

Trading functions

Direct one-to-one access to research analysts

Clearing & Settlement

Prime Brokerage services, including margin finance, short cover

Trading advice – what products might be optimal to trade

Access to research services (analyst conference calls, financial models etc)

Provision of reports (holdings, trade positions, P&L, stock loan, risk, etc)

Access to senior corporate executives of the companies that research covers

Ability to execute complex trades

Liquidity management

Assistance with meeting regulatory compliance issues

Access to written research

Will pay a large premium for better service - Value di�erentiating service

Will pay a small premium for better service

Expect as basic service

Not a service we use

40% 26% 2%32%

44% 28% 0%28%

40% 30% 2%28%

36% 34% 10%20%

34% 40% 10%16%

30% 38% 16%16%

30% 46% 10%14%

46% 42% 2%10%

46% 40% 4%10%

42% 44% 4%10%

40% 46% 4%10%

38% 40% 12%10%

28% 48% 14%10%

56% 34% 2%8%

56% 34% 4%6%

40% 46% 8%6%

38% 46% 10%6%

Source: YouGov, Accenture Research

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Source: Accenture Research

Mar

gina

l Val

ue o

f Pro

visi

on

Pote

ntia

l for

Pre

miu

m S

ervi

ces

Basi

c Se

rvic

es

Client Coverage (%)

Basic Written Research

Analyst Conference Calls

Value to Client

Access to Analyst Models

Direct One to One Analyst Access

Access toAnalyst Corporate Contacts

Hierarchy of Value of Investment Bank Research

Research services such as analyst visits and access to corporate management are ‘scarce resources’ compared to written reports and conference call participation, and are more expensive to provide. Our investment bank clients typically provide these ‘premium’ services on the assumption that clients will pay more for them. However, on average, survey respondents are not necessarily willing to pay significant premiums for these services.

What should research deliver? Interestingly, the most valued research is industry insight as opposed to more frequently produced company-specific research. While analysts may often believe that company reports are the mainstay of what they produce, and are

often given to producing more written research than may be necessary, this is not what is most valued by clients. Clients are more likely to pay a premium for direct access to researchers themselves and their financial models.

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Which aspects of research (company or economic / strategic) undertaken by an investment bank do you find most valuable? Please select your top three.

4%

30%

42%

46%

24%

34%

42%

62%

Breadth of coverage allowing more investment ideas to be investigated

Analyst recommendations and price targets

Ability to use analyst financial models to run differing scenarios

Analyst conference calls

One to one meetings with analysts

Written reports

None of the above

General industry insight

Source: YouGov, Accenture Research

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What research would you ideally like to receive from an investment bank in the future? Please pick the top three.

4%

30%

44%

50%

26%

32%

40%

60%

Written reports on broader themes, either industry or macro-economic

One to one time with research analysts

Written reports on individual companies or sectors with detailed financial models and forecasts

Access and ability to customise analyst financial models

Analysis into company and industry trends through statistical analysis and such things as “Big Data”

We expect our reliance on and the importance of investment bank research to diminish in future

None of the above

Fresh insights, trends or ideas with commercial applicability

Source: YouGov, Accenture Research

Interestingly, at a time when many investment banks are focusing research on key sectors in an attempt to better optimize available research headcount with coverage needs, buy-side clients believe that breadth of research coverage is important, as it is likely to cast a wider net of potential investment ideas

worth exploring. This is where some sell-side banks have tended to leverage their offshore (or outsourced) bases for continuing to maintain coverage across a wider space than can be possible purely through their limited onshore research teams.

Optimizing the research revenue model How clients pay for research is an interesting question. Despite separating commission payments into individual parts (“unbundling”) and the theoretical ability to pay for research separately from trading, the most common way research is compensated remains through directing trades to banks that produce the research. Electronically executed trades are often smaller in size, higher in volume, and less

differentiated. With electronic trading platforms at most banks being largely similar, these trades are often directed to pay for research. Not having sufficiently broad, convenient, and applicable electronic trading capabilities can thus deny an investment bank its share of commissions meant to compensate it for research.

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What are the primary method(s) through which you seek to compensate investment banks for research they have supplied? Choose no more than two.

Trading of Electronic Fixed income

Trading of High-touch Fixed income

Trading of High-touch Equities

Margin borrowing

Soft dollars

Don’t know

Trading of Electronic Equities

Source: YouGov, Accenture Research

54%

4%

26%

34%

10%

32%

32%

Optimizing the research revenue model is a matter of cost-effectively producing the research content valued by the most desired clients, and ensuring that they receive it and have sufficient trading channels with which to compensate the bank for it. While easily stated, accomplishing this requires careful management of research budgets, effective tracking of client profitability, appropriate sales metrics, and occasional ‘hard conversations’ with clients.

Source: Accenture Research

Proactively Assess and Source Business Commensurrate with Services Provided

Understand Clients' Potential Spend and What They Value

Focus Investment of Valued and Differentiating Services

Maximize Cost-efficiency and Accuracy of Generic Services

Focus and Coordinate Provision of Most Valued Services to Top Clients

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• Understand clients’ potential spend and profitability – Deciding where to invest in research starts with understanding the ‘share of wallet’ key clients will allocate to their most valued brokers, the potential profitability of that spend, and which research services these clients value most. While certain clients will share such information through their vote processes, for most it must be gleaned through their trading behavior and interactions with sales. Appropriate data, metrics, and relationship management tools can enable this process.

• Focus investment on differentiating services – Few investment banks can be top-tier for every client segment, product, geography, trading style and industry sector. Maintaining profitable research relationships will require focusing investments on creating differentiation with clients who will pay for those services. Tracking clients’ use of different research services and subsequent business, as well as sharing sales and service client interactions across products and regions will aid this.

• Maximize cost efficiency of generic services – Using offshore resources and cost-effective operating models can minimize the costs of providing commoditized or basic research services. This enables banks to maximize investment in competitively differentiating research products, and allows onshore analysts to spend more time with clients and corporate management. Big data and more sophisticated analytics tools are also adding automation to areas of research production.

• Coordinate provision of most-valued services to top clients – The organization, targets and incentives provided to research and sales must ensure that the most value-added research products are being provided to the clients who will most value and pay for them. Tracking analyst visits, conference invites and one-on-ones, and bespoke analyses will help enable this.

• Proactively assess and source business commensurate with services provided – Research, sales, and trading groups must coordinate to strive to source sufficient business from clients benefitting from research. In addition to client data tools and analysis, this often requires sales to initiate ‘hard conversations’ with clients to understand and ameliorate situations where business provided to the bank is not aligned with the amount of research services used. Individual client-level sales goals must be frequently aligned with research services provided.

Looking forward and conclusionsWith regard to research, investment banks face an obvious challenge: to meet demand for a product for which, in its basic form, clients are unwilling to pay a premium. This challenge is made all the more acute by downward pressure on traditional research-driven revenue streams. For investment banks research operations, this points to a number of ways forward:

• Take clients up the value curve, realizing what they truly value (e.g. thematic research with industry insights) and where they are willing to pay a premium.

• Focus on industries, regions, and trading strategies where research can leverage a depth of knowledge to allow for premium pricing.

• Carefully measure and manage clients’ use of premium research services and the allocation of trading business they provide.

• Develop a low-cost operating model for basic research functions to allow analysts to focus on client interaction and provision of premium services and content.

Financial services have been through a period of exceptional turmoil over the past few years, driving down revenues and necessitating extensive cost restructuring across most banks. But investment banking is now entering a new phase, one where controlling costs remains an absolute priority, but so too does finding new areas of revenue growth. Looking at the services delivered to investment banking clients and discerning where they are finding value, what services clients expect as a matter of course, and what services and products they are willing to pay extra to receive, can give banks important insights in their strategic decision-making.

AuthorsJonathan Firester Managing Director jonathan.firester@accenture.com +1 917 452 2332

Dean Jayson Managing Director dean.l.jayson@accenture.com +44 207 844 8295

Mohana Talapatra Senior Manager mohana.talapatra@accenture.com +86 1502 1301727

About AccentureAccenture is a global management consulting, technology services and outsourcing company, with more than 323,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com.

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