Financial Research Is Not Free, So Let’s Stop Pretending It Is

Man surprised at the real cost of financial research
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You’ve heard the expression, “No such thing as a free lunch” right? So why do so many investors believe financial research is free?

Let me assure you, research is not free for investors or providers. So, where does this illusion come from?

Historically, the “sell side” of the financial industry, or banks and brokers, has been giving away their research to existing and potential clients, such as portfolio managers, family offices, etc. These freebies were given in the hope that one day these clients would execute their orders through them, landing them a trading commission that would compensate for both the execution, research and other ancillary services.

The ripple effects of this practice of giving research for free have been, and continue to be, devastating to the industry as a whole, not just to financial research producers. It has given rise to 3 common misconceptions about financial research.

Misconception #1: Financial Research Has Little Value

Many professional investors believe, incorrectly, that trading commissions paid to bulk-servicing banks or brokers only cover execution and that research and other ancillary services are free.

Fact: Compare those transactions with execution-only offerings from agency-only brokers and another story emerges. Trading commissions are between 2 and 6 times higher than execution-only services i.e. 10 to 20 bps vs. 3 to 5 bps. These additional services are not free, they are paid for through higher execution commissions.

Misconception #2: Banks and Brokers Can Fully Capitalize on Their Knowledge Through Trading Commissions

The motivation for Brokers and banks under the old system was clear: provide research upfront now and you will net a hefty trading commission tomorrow. It’s now apparent that this inducement system is working a lot less effectively.

Fact: Banks’ and brokers’ research is being freely passed around by investors who haven’t paid for it and therefore do not see its worth. Financial analysts are not cheap, so relying on goodwill from investors who think a researcher’s unique knowledge of companies, sectors, assets and markets has no monetary value is a shaky proposition at best. To say nothing of how it makes a researcher’s business planning and forecasting complex, as you are left depending on the goodwill of your clients/investors to execute their order through you.

However, even if we ignore everything in the previous paragraph, the fact still remains that the inducement system is not as effective in a world where execution-only brokers grow in influence. As more savvy investors take advantage of the free research they are receiving (from you or one of your clients) before trading through brokers with lower commissions, the inducement system is patently falling short of its ultimate objective. The research that lead to the trade is not being paid for.

Misconception #3: Trading Commissions Ensure Unbiased Research

The belief is that the status quo will drive better research as the best research will be compensated through the trades it induces.

Fact: In actuality, paying through executions embeds important conflicts of interest: analysts may be stimulated to drive trading activity and professional investors may over rotate their own clients’ portfolio to retain direct relations with sell side providers

3 Steps for Sell Side Research to Take Back the Night

Sell side researchers must first stop devaluing their own core know-how i.e. your unique knowledge on the assets that you cover, by:

  1. Protecting your-research content as much as you can by deploying technology based solutions that discourage your clients from passing your content around. Emailing your pdfs is definitely something that you should stop as soon as possible.
  2. Only giving access to your research to investors that are prepared to fairly compensate you for your work
  3. Pricing your research content separately, helping your client to realize that research is not free to produce or consume.

In addition, get ahead of the curve in implementing best practices and stay as clear of conflicts of interest as possible.

Look at the unbundling regulatory change as a one-time opportunity to positively re-structure your research business. Don’t lose more time before taking action.

If you really think about the current business model, you will probably come to the conclusion that it’s not sustainable. The past and present status quo are therefore not an option, but being prepared for the future could reap huge benefits for your business.

4 Responses to “Financial Research Is Not Free, So Let’s Stop Pretending It Is”

November 14, 2015 at 5:50 am, Nitin Khandkar said:

While I agree that un-bundling is the way forward, it’s a fact that “proliferation of free research” is the key reason why investors are unwilling to pay for research. Thanks to the internet, a humongous amount of research keeps floating around, almost in real time, on social media such as Google Groups, Facebook, WhatsApp, etc. Investors are so used to getting free research, that they are unlikely to pay for it, till such mindless proliferation is controlled and curtailed.


November 16, 2015 at 2:01 pm, vontrap said:

> how come you have so much free research on your site then?


November 16, 2015 at 9:04 pm, Addressing questions about equity research at the University of Florida | Sell Side Researcher said:

[…] all, clients can buy individual reports from a researcher. Check out the recent article written by and read their take on the direct-payment monetization model for equity research. Many research […]


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