Peter Bentley describes MiFID II as his “baby”. Resisting the obvious joke about it being a 12 and a half pounder that neither investment banks nor asset managers can handle, Bentley spent years knee-deep in data, consulting with sell-side firms on exactly how the wide-reaching regulation was going to hit their business models.
“Eventually, Macquarie’s equities team said that they were paying me handsomely just to tell them how the industry is screwed,” he says. “They asked me to be more proactive and help them do something about it.”
Under MiFID II, investment banks will have to 'unbundle' research costs away from other trading charges. This has led to a tough period for research professionals on the sell-side, and McKinsey is predicting that revenues from research could reduce by as much as 50% once the regulation is rolled out on 3 January next year. Equity research headcount has reduced by just 11% since 2011, suggests McKinsey, while sales and trading staff have been culled by 40% over the same period. This disparity could be corrected next year.
Bentley spent eight years working for Aon Hewitt, consulting with large investment banks on how to maximise their profitability. Inevitably, MiFID II started to dominate the conversation and so in October 2015, along with his colleague Nicholas Chambers, he left to join Macquarie as a managing director, helping them to redesign their research offering in an attempt to make it as profitable as possible. The result was Macquarie Dimension, a pay-as-you-go platform for equity research that allows fund managers to pay for a basic subscription and then bolt on a la carte services. If a fund manager wants corporate access or a phone call with a top analyst, all of this costs extra.
Dimension has been something of a trend-setter. Deutsche Bank is reportedly rolling out a pay-as-you-go research model as it slashes the costs of its fixed income research, while Credit Suisse, BBVA and Natwest have said they may provide some research for free and then offer clients chance to pay for more value-add services. Meanwhile, large investment banks are engaged in a research price war - the FT suggests that banks have cut all-in research costs from $2.5m and $4m annually to as low as $250k.
Bentley says that he brought a different attitude to Macquarie because, aside from a three-year stint in UBS’s prime brokerage division, he is not a ‘banker’. He tried to instil a “digital” mindset to the bank, he said, and attempted to come up with a practical - "if not groundbreaking" - method to maximise profits from research based around what clients consume. The key, he says, is understanding the audience. Applying a flat rate, and then keeping everything behind a paywall, does not allow for that.
“You could charge, say, $25k for five users accessing your platform. You get transparency about what they consume, and what type of research is useful for them. After a year, you understand your customer and can start selling luxury items based on their usage.”
Inevitably, these “luxury items” will involve time on the phone with a star analyst. While banks have been slashing the cost of research, having the chance to hear the views of top equity researchers remains at a premium. Some U.S. investment banks are quoting $15k for a single phone call, but these charges average out at $2k, according to research from Third Point.
“Analysts are a finite resource, and could be one of the deciding factors on whether an investor makes a trade. If they make $2m, that $15k investment seems like good value,” says Bentley.
The “uncomfortable reality” under MiFID II is that investment banks have to work out how to keep “bums on seats” in a division where intellectual property has traditionally been given away for free, says Bentley. “Nine out of ten analyst conversations with banks may have resulted in a decision not to trade. Monetising that, and understanding the value of your research team, is the key challenge under MiFID II.”
Both Bentley and Chambers left Macquarie this summer, and have just started their own digital consultancy, Kent Marlow Solutions. Bentley says his time in banking was always temporary, and once Dimension was up and running there was little incentive for them to stick around.
Bentley says that being on the inside made him realise how hard it was really “influence change” within a large investment bank.
“A lot of senior people in banking only know what they’ve been taught within a big bank. I’m 37 and a lot of the people there were older than me and never been outside of the banking world,” he says. “They haven’t really embraced change or innovation.”
Bentley also believes that managing directors within investment banks need to be seen as “inspirational” for analysts and associates who are increasingly having their heads turned by more innovative technology companies.
“When I was at UBS, I knew I could stay and – if I didn’t get fired – I could earn a handsome wage and a good lifestyle, outside of work,” he said. “But I wasn’t inspired by those above, so after a few years I decided to take ownership of my career. Maybe it’s the millennial in me.”
Bentley says that he spent his time at Macquarie trying to be that ‘inspirational’ MD – taking control of his own workload, not being tied to his desk.
“If you’re an analyst and associate and you see your highly-paid MD at his desk at 6am, leaving at 10pm, it sends out a bad message,” he says. “Essentially, it says that there’s no escape from the drudgery or long hours, no matter how long you stay in banking or how high you rise. MDs should be showing juniors how their careers can evolve.”
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