Unbundling

Uncovered

How to work with
MiFID II

November 2017

Rob Farenden




Unbundling Uncovered
Recently I attended the conference Unbundling Uncovered that was hosted by Substantive in
London. It was the first time that I have been to an event like this, and it was a very last minute
decision (I would like to thank Substantive for being able to amend their systems to allow me to
buy a ticket on the door..!) but one that I am incredibly glad that I made.

A lot of the people I know, work with and even placed were in attendance, and the content was
so centre stage to what I seem to spend more and more of my days speaking to people about,
so I thought I would take a few minutes to write up some of the insights that I gained from the
day as well as wider insights from across the market.

When embarking on this I was not expecting it to be quite as long as it turned out, and I realise
(that just like equity research!) no one really has time for long word documents. As such I will
start with the concise summary over-riding key points that I took away from the day, along with
the advice that I would hazard to give, and followed up with a more detailed summary of each
topic covered if you want to see further into particular areas.

And if even reading a summary is too much of an ask, let me briefly highlight what I believe the
key points to succeed going forward are:
1) Short term stability and flexibility
2) Genuine value add analysts
3) Limiting real benefit of product to those who pay for face time
4) Rock solid knowledge of the value being added (backed up by data)
5) Sales people who can sell in this new type of relationship

I will be following this article with a second piece aimed far more specifically at how F&L Search
can work with institutions and individuals over the coming months (and beyond) through these
turbulent times in the market. If you would like to get in touch to discuss this further you will
find my direct line and email on the bottom of every page!

SUMMARY
The huge over-riding view that I took away from the Unbundling Uncovered conference was
that nearly all of the conversation points were things that we at F&L Search have been
discussing with people (both sides of the Atlantic) for months now. I knew that this was a topic
that we discussed with people regularly, but had expected that at an event with senior
representatives from the biggest institutions across the street, and with chosen experts on the
subject matter, that the discussions would be far more in depth than those we have been
having. However, I came away from the conference with a strong belief that this is not the case
and if anything, the conversations we have been having are ahead of where most of the talking
points were throughout the day.

The biggest example of this was on the repeated discussion on what actually constitutes
research. I was amazed that at this stage, 2 months out from regulation change, it still
seemed to be a fairly revolutionary idea that you do not purely pay for (or indeed that
regulation is limited to) written product; that calls, conferences and meetings all fall into the
category of research.

F&L Search | Rob Farenden | rob@fandlsearch.com | +44 7805 026 128 2



There was also a complete lack of any conversation about the role of a sales person in this
process. I was very surprised that in all the discussions that covered what could be seen as an
inducement, there was no mention of interactions with sales people.

CONCLUSIONS
I would like to think that I have learnt a lot from my time spent talking to research focused
people and, the one unarguable truth that stands under any regulation, is that there is very little
value in telling anyone anything unless it can lead to or be part of a process that leads to an
actionable conclusion. In the case of this report we are not talking about investment ideas, but
internal strategy regarding how to best position your research to succeed in the new world.

With this in mind below are a selection of thoughts and views from F&L Search. In these I have
taken into account the numerous conversations I have had over the past 12 months as well as
the subject matter from the conference.

Long term success
What will people still be willing to pay for? In a world where pricing is falling rapidly,
commodity research is not going to get you anywhere. Pick the areas that you can be the best
at, and then you can defend your price. An equity team of VPs with the name of a global
investment bank behind it are dime a dozen, and they are now in a race to the bottom on
pricing, playing chicken with the FCA as to how low they can go before it is seen as an
inducement.

More importantly, and also more revolutionary, success will come to those who completely
change the way that they structure their offering to be able to match up their revenue streams
to what clients are willing to pay for: access to top people.

It is looking ever more likely that the subscription agreements covering access to written
research are going to be at far less than ideal levels. Basic economics, where there is little to no
added variable costs with servicing clients (but a large fixed cost to produce the research), is
unfortunately seeing the sell side compete and drive all its prices ever lower.

From where we are now it seems a tall order to climb back to a more favourable cost level, so in
reality there needs to be a work around.

With revenues for access to product being so low, the bulk of the revenues need to come from
the interactions with the firm. The basic model is to roll out written research to clients as a tool
that leads to conversations, which is where revenues can be made back. If you are charging
$10,000 for a client to subscribe to your research this may be a disappointing headline price,
however if your top 5 analysts have a call with them each week at $1,000 a session, that is still
going to be a $250,000 account.

The other big advantage is going to be if you can have sales people with enough credibility that
they can also be charged out for interactions. Specialist sales people should definitely be able to
do this, however, I could not say with confidence that there would be a willingness for the buy
side to pay for access to generalist sales people.

F&L Search | Rob Farenden | rob@fandlsearch.com | +44 7805 026 128 3



In theory this model works well but to do this you would need:
a) Your analysts to be genuine value add people are not going to want to speak to
anyone outside the top few analysts in a vertical.
b) Your product needs to be amended to entice this Im suggesting reducing the
thoroughness of written work. The written piece needs to reach interesting conclusions
so that the client clearly sees the value, but it also needs to leave just the right amount
of gaps meaning a phone call/meeting is necessary to fully realise its worth.
c) Your analysts need to be on the phones and in meetings a lot.
d) Sales people need to know how to sell this new model, how to do a similar job to what
they are used to doing, but adding a request for a cheque at every interaction. Are your
sales people equipped with the skills to sell subscription products? (Do you need a
head-hunter who knows the people who can sell subscription services and calls...?)

Reporting
The other element that seems to be key to continued success is having data to support your
pricing. The entire problem here is that the FCA felt that investors were being ripped off. You
need to build a case as to why you are charging such sums of money. Recording consumption
(how many research pieces have been used, how many calls, how many analysts, how amazing
those analysts are, how relevant you are to them in terms of coverage and their investments) is
really the bare minimum. The difficult bit will be recording how this benefitted your clients.

Currently what we have a situation of:

We pay provider X sum of money $Y, because they are really helpful and
portfolio manager Z appreciates what they do.

It should be easy enough to get to:

We pay provider X a sum of money $Y, because every year we get access to 3
weekly updates, that are read by an average of 12 people, and have 2 calls a
month with each of the key analysts relating to the coverage of our fund

But if you want to really be differentiated you need to go one step further:

We pay provider X a sum of money $Y. Our consumption levels are clear.
Particular value was realised through their research note on Company Z,
followed up with a call with the analyst, which was part of the decision-
making process that lead the firm to change its position the next day, and 3
months later this new position has returned profits ($lots?!).

F&L Search | Rob Farenden | rob@fandlsearch.com | +44 7805 026 128 4



Short Term Survival

As is so often the case, the uncertainty surrounding big changes is as damaging as the actual
changes themselves. With the current level of uncertainly in the market people are reluctant to
commit to anything, and everyone is waiting to see what the rest of the street is doing. The one
thing that seems to be agreed upon by everyone is that this is not as short term a problem as
we might hope and, in all likelihood, we are at the start of a multiple year journey of price
discovery.
This is not a case of waiting for Jan 3rd and then everyone will be ready to commit. There are a
few things that I believe are going to help companies get through to 2020 and beyond:
a) Flexibility to cater to clients in the short term throw out the idea of 2 year contracts,
theyll take years to approve. Rolling quarterly contracts will be much easier to get
commitment from clients, and give much more ability for both parties to amend as you
go.
b) Multiple revenue streams if you can only get a low ticket for access to research, go sell
it to more people. Sell to FI teams (they certainly consume equity research). Sell to
corporates (particularly those of you with a macro/policy capability). Be on the lookout
for other opportunities.
c) A stable platform basically being a healthy business. If your margins are good there is
obviously room to be squeezed in the short term, but how far can this go? Low running
costs are obviously key here how many support staff/traders/middle office do you
need? Cut the fat that isnt producing.
d) Cross subsidisation this will help massively in stabilising your platform. Can you shift
costs onto you banking business or asset management arm?

So to conclude on this, to succeed you need:
1) Short term stability and flexibility
2) Genuine value add analysts
3) To limit real benefit of product to those who pay for face time
4) Rock solid knowledge of the value being added (backed up by data)
5) Sales people who can sell in this new type of relationship

F&L Search | Rob Farenden | rob@fandlsearch.com | +44 7805 026 128 5



Overview and breakdown: Unbundling Uncovered Conference

The day consisted of a short introduction from Adam Wreglesworth from the FCA, and then six
50 minute panels on the topic of:
I) Regulatory Arbitrage
II) Managing the Investment Functions under New Research Regulations
III) The Research Product how will it change and what are the consequences
IV) FICC Research how to apply procurement best practice in a market where
commission dont apply
V) Technology/Platforms Delivery, Payments, Tracking and Permissioning
VI) Defining Best Practice in Research Procurement
For information on who took part in each of these and more detail in what they covered I have
attached the agenda for the day.

Opening Address
The over-riding summary I took away from this was that the FCA released the final rules on the
3rd of July, and since then have been amending this theoretical best practice to function in real
life, amending a one-size-fits all approach.

The key adjustments from the original regulation include:
How it relates to Private Equity and Venture Capital
Flexibility on the RPAs around payment time frames
Allowing trial periods of 3 months every 12 months (note only one trial period per entire
provider to the entire client, i.e., if one Blackrock EM PM trials BAML EM Equity research
then a US PM would have to wait 12 months before being allowed access to their US
equity product)
Relaxing the rules on research relating to IPOs

Of these, the real key point to most of the people reading this will be the trial period. I have had
numerous conversations over the past 12 months with a whole host of people, in particular in
relation to independent providers, about how this business could work without trial periods.
Although no one I ever spoke to really seemed to believe that they would truly ban trial periods,
there will still be a sigh of relief from sales people across the street who will be able to continue
to sell their product with their tried and tested process (spoiler alert later on I will seriously
challenge this comment).

However, the detail that glares out to me is the stipulation limiting the trial period to once per
provider/consumer relationship. The bigger the institutions, the bigger the logistical nightmare
becomes. I can only imagine the headaches management are going to have at the investment
banks in trying to align multiple departments to all work the same client in sync with each
other

Also worth noting here is the huge migration of firms looking to pay on P&L not RPA (unless you
are Fidelity but I am not going to say any more on them here).

There were a few other interesting questions raised and answered to some extent. It was
suggested, much to the dismay of a large part of the room, that written agreements were

F&L Search | Rob Farenden | rob@fandlsearch.com | +44 7805 026 128 6



heavily preferred by the FCA to prove there was no inducement. It was also made very clear
about research being not limited to written product and can come in the form of Traders or
Sales Traders speaking to clients (the line seemed to be drawn at giving opinions but not
justifying them).

The real question that was not answered was what is defined as enough payment to justify
access to research. My take away was that it would be what was seen fit by the FCA on a case
by case basis, but ultimately if it was for written research only the price would be incredibly low,
so long as there was no free access to analysts. But honestly there was no real clarity here.

There was also the issue raised on cross border agreements between FCA and FCC. It was all
common sense, or at least I took nothing away of note.

PANEL I: Regulatory Arbitrage.

Summary nothing revolutionary came out of this, most should be aware of the majority of the
content covered. Perhaps just the overwhelming favouritism of P&L over RPA.

Key points:
Retail more likely to pay RPA, institutional will demand P&L.
Noise being made around competitions committees about people signalling to the
market how they intend to pay.
Everyone now moving to P&L across everything.
o RPA have become very complex to put in place.
o Especially when rolling out to US/Asia.
Questioning if RPA and P&L can ever co-exist.
o Suggested some will be P&L in Europe and not elsewhere.
o Very difficult to structure.
UCITS seem to fall into regulation in UK but not rest of Europe.
o Very unclear at this stage where collected investments sit would seem only
pure UCITS funds in Europe are exempt.
There is expectation for pressure to come not only from FCA on research providers, but
also from their clients.
VERY unclear on how long you will have to sort things out maybe 6-9 months, but
there is no guarantee that penalties will not be back dated.

F&L Search | Rob Farenden | rob@fandlsearch.com | +44 7805 026 128 7



PANEL II: Managing the Investment Function under New Research

Regulations.
Key points:
Its become surprisingly apparent how much equity research is consumed by FICC.
Where agreements seem to be in place, they only cover written research and no
consideration of analyst exposure.
Move to P&L driven by consultants (refusing to put RPA structure firms on their buy
lists).
Some institutions are already P&L (such as IPS), for them:
o Get a lot of research for free that they will no longer have access to.
o Price of what they do pay is being driven down.
There is going to be a conflict when it comes to source of idea generation; was it the
research provider or was it the fund manager?
Schroders said their list of providers had actually increased.
There was also a comment that regulation is overflowing into data which the buy side is
used to getting for free.
Buy side have quant models to price value (Davy mentioned an algorithm comparing
stock coverage of research providers against what they hold).
Price is still very uncertain for:
o Conferences
o Analyst access (calls/meetings)
o Corporate access
When asked what the buy side needs from their providers:
o Simplicity
o Flexibility to work through the price discovery period
o Ideally a menu approach of options
Big push back from providers so unlikely
o Access through a central platform
Control consumption and access
Across all providers ideally
Across all asset classes
Providers are mixed, but getting towards it
Some players (Credit Suisse mentioned) have decided to make all their research freely
available to avoid the whole issue.
o Question as to how much value research that is openly available can add.
o Revenue it would generate would not cover the cost to set up.
Dream model: twitter feed style where every analyst they want to subscribe to
published headline of product. From here you could click into it to see more and then
go one level further and contact them if desired. Cost attached to each level of
involvement.
This new model is increasing the number of internal conversations between PMs.
Benefits specialist research providers.
Could increase coverage of stocks outside the large cap universe where there is
currently very little.

F&L Search | Rob Farenden | rob@fandlsearch.com | +44 7805 026 128 8



PANEL III: The Research Product How will it change and what are
the consequences?
Key points:
With prices of written research falling, to make enough money:
o Use the written work to provoke thoughts and start conversations.
o Turn it into a product to support IB business to win corporate deals.
Euro IRP have called some banks pricing predatory.
Cross subsidisation is key for the banks.
Regulators will have a hard time when it comes to very low pricing.
There is no price leadership coming from key players.
Written research is moving to be a loss leader.
Options to make it profitable:
o Increase price (will be tough).
o Reduce investment (analyst time) into it.
Rationalisation of suppliers expected for a big buy side firm to go from around 150 to
around 50.
Concern that in the new world independents will look very expensive.
Will providing just research as a stand-alone be profitable?
For some rough figures for an equity research department; it will cost around $600mil,
will generate $250-$300 in secondary revenues, and can write $150 off for IB arms,
leaving $150 shortfall. Claimed by Shai Hill of Macquarie and I have no confidence in
these numbers, seemed plucked out of thin air.
There will be the biggest short fall for the short term as price discovery happens; this is
when cross subsiding is going to be most essential.
Remuneration (of analysts) looking to go up at top end, but fall away elsewhere.
Expect to see research:
o Become more specialised
o Fewer providers
o More valuable providers
o Less focus on written work
o Data focussed
o Delivery being driven by users

F&L Search | Rob Farenden | rob@fandlsearch.com | +44 7805 026 128 9



PANEL IV: FICC Research How to apply procurement best practices

in a market where commissions dont apply.
Key points:
Much smaller space, only 40-50 key providers that have announced pricing.
Pricing has plummeted in the last 12 months from mid/high 6 figures to 4 figures.
o This drop has been supposedly sell side driven, and not from the buy side
pushing back.
Citi were frustrated that the price has been set so low and broadcasted so widely.
Arguably a lot more volatility in what a FICC research product can look like, so there
should be more variation in price points.
RSRCHX (platform for delivering research) said that on their platform of 250 providers
they have seen no real change in pricing this year.
Consumers are worried about low headline prices, but then costs soaring up from
interactions.
4x more is spent on equity research than FI.
o FI research is justified by internal book.
Threadneedle said their FI consumed more equity research than FICC research, though
only through reading, no access.
Credit research is now mainly produced by mid-tier players.
o All to do with trading.
FICC research has always been a loss leader. May make it all free and publically
available, but if this happens does it have any value?
There was more, but I had a client that needed an urgent mandate so I lost the last 20 minutes
on the phone to them

F&L Search | Rob Farenden | rob@fandlsearch.com | +44 7805 026 128 10



PANEL V: Technology/Platforms Delivery, Payments, Tracking and

Permissions.
Key points:
Think the future is a live feedback on research used. Seemed to be suggesting
something along the lines of a real-time broker vote.
The new world demands data to better evaluate the usage and value.
Consumption metrics not enough alone doesnt show value.
Questions on who own consumption data through platforms.
Different models have different revenue streams (buy side/sell side/subscription/% of
consumption) it could be worth looking around to find what best suits you.

PANEL VI: Defining Best Practice in Research Procurement.

Key points:
Most of this had already been covered in previous panels.
When does a price become so low it counts as an inducement?
Big focus on the uncertainty there is around pricing.
o US much more reluctant to pay.
o Price discovery will be a process over several years.
Want processes to allow for this uncertainty, e.g. pay quarterly, then review quarterly
(basically the forward looking broker vote).
Big question on how to measure value/quality of research.
o Ultimately the PMs must have the last say.
o Could have different value to different people.
Likely that the trial period will be utilized to facilitate price negotiation.

F&L Search | Rob Farenden | rob@fandlsearch.com | +44 7805 026 128 11



A final word
There is no doubt there is huge change coming in 2018. Uncertainty is wide spread, and with this
there are big areas of negativity. This is taking root in people across all levels, but more often than
not I find myself speaking with junior/mid level people with no deep understanding of specifics of
the changes in the regulation, and equally no idea how their institution is angling to cope. It seems
that the negativity is based one part on fact and one part on hearsay.

I have spoken with someone who decided not to take a position with a firm because, during
an interview with the team, there was a comment made that questioned the longevity of the
institution. This type of negativity is toxic.

I would heavily suggest that if you are in a position of authority you reassure those around you that
things are going to be ok, and take the time to give them the detail around how you will still be
successful going forward. For a lot of people this is the first real challenge that has arisen in the
finance sector during their career. A lot of your team (I also fall into this category) have not worked
through a financial crisis. These people may quite frankly need reassurance that this is how things
go and that the good times, although maybe out of sight right now, will come back again.

At F&L Search we are certainly very positive about the coming few months, continuing to grow our
team and looking to deepen our service to the whole of the capital markets space. If you are
interested in having a conversation about these changes or anything else in the last few weeks in the
run up to Christmas then do reach out to myself or the team.











Rob Farenden
F&L Search
Director

F&L Search | Rob Farenden | rob@fandlsearch.com | +44 7805 026 128 12