Investment research organizations have to work harder for their money. Add to that the compliance and regulatory challenges, the cost of business remains high. Leveraging the evolving landscape of digital technologies to expand your ability to get closer to your customers should be a high priority. In other words, are you ready for the future of investment research?
Ayn Rand once said that ‘words are a lens to focus one’s mind’. Now this may be true of a sell- side analyst putting together a 100-page research report on the pros and cons of a particular topic. But consider this, how would the analyst feel if the only part of those 100 pages of painstaking research was the contents of the first page of the report, and moreover, and the key takeaway of the report delivered verbally by a salesperson in a one-minute pitch to a client?
Welcome to the real world. I think it is fair to say that at one time or another, we analysts and ex-analysts have been “asked”– make your research commercial. Long reports get compressed into a one-line comment on the question, “So what is the takeaway?”- Topic X – positive, Topic Y – negative. So why are we still producing research reports with such volume? Or that incredibly annoying company update to the sales team with the often repeated ‘in line with expectations’ commentary. Imagine producing a sector report, initiating on ten stocks, where all the stocks are neutral or market perform. The creator of the report focusses on getting an accurate position of the cycle of the stocks only to tell the world that they should do nothing with them at the moment.
So how are we solving the problem? Currently at best, the industry is taking baby steps. What are the fundamental problems with research and the way the business works in the post global financial crisis world? People require more information, faster and more digestible. The salesperson is a metaphor for the way in which the industry should move i.e., from small, highly directed pieces to more in-depth analysis, tailor-made and based solely on the needs of the consumer.
Componentization in the investment research world refers to the act of breaking down the content of a research report into various “components” and then utilizing such individual components (or group of components) to feed multiple different channels and platforms to broaden the digital customer engagement footprint of the research organization.
To ask the author of a research report to prepare his or her research in multiple forms simply adds to the workload at their end. For research organizations with legacy systems, the approach has been dis-jointed at best or a “bolt-on” approach, feeding research to multiple different channels; but without entirely eliminating the tedium associated with such quick-fixes. For example, bolting on a website or a blog site, formatting the content and publishing it may necessitate additional compliance checks, adding to the workload. With effective end-to-end management of the componentization process and its ability to feed multiple channels, one is able to create workflow solutions that do not lead to duplication of effort; while ensuring complete quality control and consistency of content across channels and platforms.
The advent of social media and increasingly more innovative platforms to engage ones’ customers, the need for greater control and appropriate checks and balances in the content creation and dissemination process has raised the challenge when it comes to effective “componentization” and its management across the value-chain. Any system needs to be able to support two things. Firstly, the author needs to use all the tools to write research quickly, efficiently and only once. Secondly, the way in which the author writes the report should be completely transparent to the collection of information as part of the componentization process. A report needs to be thought of as a collection of ‘things’. Consider the front page of a research report. Title, Subtitle, bullet-points, recommendation and charting. Going beyond the first page, the ability to collect other information that is pertinent to the analysis is key. The report is now a set of components where each component could be anything. Author once, collect the components, deliver to the consumer, format independent across multiple platforms and channels.
Componentization within research is no longer a technical curiosity which it was in the late nineties to mid-noughties. During this period, software development teams would use the power of the authoring platform (normally Microsoft Word) to automate financial content and charts.
The result would generally be a PDF file distributed to the consumer and that was the extent of the work. However, as the last decade came to an end and the onset of social media and disrupting content distribution platforms took center-stage, together with the smartphone revolution, a massive shift occurred. The consumer was now the focal point, with businesses springing up and disrupting the old order by giving something the consumer wanted in the way they wanted it.
So how does this have anything to do with investment research? Well it turns out the authoring of research still requires these tools (Microsoft Word or similar, or a browser). However, these tools lend themselves to the old world, a world where we were given something to read and consume and if we didn’t like the format or the approach we had to stick with it.
Morphing the original document to the formats required by the modern day consumer without user intervention or duplication of work drives the whole need for componentization.
At the moment it is really an all-or-nothing approach when it comes to research related products and services. In other words, you are so important that we will put the might of the institutional salesforce to work on you or (at the other end of the spectrum) you can be part of my email list. With more and more regulation coming into play, requiring transparency on payment of research services, getting on that email list may soon be a hurdle that without correct research pricing will hurt the sell side far more than the buy side. The reason is simple, a product that for years has been attributed zero “cost” to the buy side now needs to be paid for in “explicit terms”. However, like that expensive Ferrari, do you really need it to travel to the office on a day to day basis?
And even if you do, you are unlikely to have multiple Ferraris? The same is true with investment research, misprice it and watch the exit of sell side firms from the research business as the revenue model crumbles. This was highlighted perfectly by Michael Mayhew of Integrity Research in his summary of the research industry, why have tens, potentially hundreds of sell- side houses giving a view on a company or sector? Doesn’t the modern consumer now favor quality research but more increasingly in the format which is quick, simple and delivers to the needs of the consumer. Darwin’s laws in perfection, what you don’t need you lose. Natural selection based on consumer needs.
With a major shift to focusing on the consumer, together with increasing regulatory scrutiny, how do you (as a research organization) give the consumer what they want? Forget the revenue line for the moment, in other words, getting paid for your research. The latter is subject to market forces and what the buy-side is prepared to pay. Looking at it from a cost perspective, getting value-add to the client is key. This is the classic cost versus value-add tussle to arrive at an appropriate price for research. If your value-add is low (as a research service provider), it does not matter what your cost structure is, it is unlikely your client will pay a price for your service that makes you commercially viable.
Client needs differ from one organization to another; and within the organization from one individual to another. Some want the brief update – the elevator pitch; while others want the 5- minute summary and may be open to reading the report. Now we have established the different types of clients, let’s look at the mechanisms currently available. If you are not a tier 1 client, then you are trawling through email delivered either to your inbox or to a common inbox. The sheer volume of email has now reduced the analysts work to unread status. Top tier and mid- tier clients now get so much email they actually have a common mailbox and they have 2 phone lines. One is voicemail and the other is their line. Voicemail allows them to get back to the 1- minute summary and potentially unwanted information equally as quickly. Dismissing the information may lead to the client missing the information? Surely there is a better way?
So the consumer is king, why not give them your research product in the way that they want it. At the moment the consumer really has 3 options (i.e., email, phone, website etc.). Why not give them 20 different ways to access and consume your investment research? Now you can send your investment research to all channels and leave the consumption to the consumer in the format they desire; while retaining your ability to track consumption.
Getting your investment research in a size and format required by each consumer, delivered to the consumer seamlessly has to be the way forward. From ANALEC’s point of view, the technology exists and has done so for some time, but very few technology companies have adapted the technology successfully to meet specific business objectives in the investment research world. Around 7 years ago we componentized investment research to allow multi- platform and cross-medium delivery. This is only recently finding its way into industry standards. Componentization itself is the only efficient tool to facilitate this evolution when it comes to delivering content across a wider digital footprint.
Take the 1-minute summary person, why not Tweet the story out with the link to a second layer of detail? This would allow buy-side analysts to follow the analyst and get the information they want; bite size format. The sell-side analyst gets transparency, knows his/her followers and if the annoyance factor gets too high (too many Tweets) the buy side analyst stops following the analyst sending a clear signal to his/her sell side counterpart. If the detail is required, the consumer needs to only click the link to take them to a précis, then on further if they get interested, ultimately culminating at speaking physically with the author irrespective of tier. All of this point to catering to every possible user experience. Pay for the level of service you desire.
The traditional approach has been that the analyst produces a research note, and sends it out to clients as a PDF or to the sales desk; via the email system. The analyst now expects the client to “read” his/her research. However, the consumer now has multiple channels via which to access content; particularly on-the-go (i.e., the mobile consumer). Little has happened in the research space that makes content easy to comprehend and consume in the mobile environment, except for every brokerage firm launching research Apps and within the App most content sits in PDF document form; almost defeats the whole purpose!
The traditional approach has been that the analyst produces a research note, and sends it out to clients as a PDF or to the sales desk; via the email system. The analyst now expects the client to “read” his/her research. However, the consumer now has multiple channels via which to access content; particularly on-the-go (i.e., the mobile consumer). Little has happened in the research space that makes content easy to comprehend and consume in the mobile environment, except for every brokerage firm launching research Apps and within the App most content sits in PDF document form; almost defeats the whole purpose!
We at ANALEC have spent considerable energy and resources to make our software capabilities agile in order to be able to adapt to our client needs in the shortest possible time frame. At ANALEC we are playing significant change agents to help our clients’ evolve to the changing landscape and keep pace with their clients’ evolving habits. We believe winning the customer engagement battle has to start first by making research available across multiple platforms and channels in an “easy to consume” format and then being able to use data analytics to respond to the client usage behavior pattern to track its effectiveness to engage.
To make it easy for the analyst why don’t we consider the easiest way to create an investment report. This turns out to be well analyzed and is in place. The industry moved away from Adobe PageMaker because it was difficult for the end user. Microsoft Word or an editor within a browser offers the nice sweet spot giving power to the analyst and allowing customized tools for formatting. So let’s not disturb the analyst. There really is no need.
The key is to provide the analyst with the framework to take the existing working process of an analyst and capture and componentize their work without them really knowing is the Holy Grail in terms of the next stage of the research.
The analyst can write in Microsoft Word and this is transformed into a blog post, a mobile and tablet friendly web portal, a Tweet, a posting on LinkedIn, an RSS feed etc. Conversely, for the web enabled analyst, he/she should be able to write as a blog and have it re-rendered into a professional looking piece of research.
Consider the analyst, he or she writes a 140-character Tweet, records a 1-minute video, compliance officers approve the package as a whole and overnight, the analyst reaches an audience in ways never thought possible. Yet the workload of the analyst is unchanged but the bang-for-buck is greatly increased in the market place. We believe there are enormous possibilities for the analyst to be more commercial without adding to his/her workload. That 1- minute video has just replaced the salesperson call, delivered to a massive audience.
Interoperability between systems is now seen as the norm for system to system communication. But what about reacting quickly to the changing requirements of the end-user? After all, with MiFID II, all research consumers are being asked to put an explicit charge for their research services consumed in some form or another. Application Program Interfaces (API’s) are nothing new in the field of software but the real key to providing long lasting quality research systems is the ability to adapt the core research system. This adaptation will allow a new process to be handled by the use of explicit frameworks, developed and already present in the research system. In this way, a key communication channel or business process which traditionally would be ad-hoc developed is now developed in a fraction of the time and cost. In addition, because the framework is in place, it can be in lined within the research system, making the whole experience totally seamless.
Many years ago, there was a big craze over money flow. Trying to predict a stocks rising or falling by the money entering or leaving a stock with a lag effect. Get the lag effect right and make money. Heavily skewed retail markets for example Taiwan are perfect markets for crowd sourcing of investment ideas. The concept being if enough participants start thinking in the same manner, it tends to move stock prices and consequently markets.
In a paper produced in 2010 by Eric K. Kelley and Paul C. Tetlock of the University of Arizona and Columbia respectively, they show that “the daily buy-sell imbalances in retail orders positively predict firms’ returns at horizons up to 20 days and that predictability does not reverse at 60-day horizons.” The paper hypotheses 3 reasons for this, 2 of these directly relate to big data and crowd theory. The first is the fact that there are some people who simply “know more” about a particular stock and can set the ball rolling. The second is that once people see momentum on a stock they will buy into that stock thus creating a self-fulfilling prophecy. So if we can get the opinion of the crowd and the momentum, we can use this to get one-step ahead of the market.
In reality it all boils down to signals. What causes a YouTube video to go viral is not up for analysis, the fact it did and we can monitor its progress and act on it is.
Now that we have all these new, previously untapped consumers getting the product they want in the format they want, does it stop there? Of course not! Once the componentization is in place with each component tagged and referenced we have the ability to collect and analyze the consumer. We get to know what the consumer is thinking, there likes and dislikes, agreements and disagreements. In its simplest form this is readership statistics but each ‘thing’ which was originally a component in a Microsoft Word report becomes a tagged item across the Internet, infiltrating its way into an ever increasing app ecosystem. How better to know your customer by analyzing the very way they interact with your components?
Capturing of small pieces of information over a large base still requires a few items to be in place. We can all capture trade data, tick data and general movements of stocks but what drives them is a function of many aspects some not directly in our control.
At the heart of this if we look at the current state of play is the access to granular level of detail on consumer behavior via the data aggregators. Sell-side houses post their research to aggregators and in the majority of cases, it is a black box. The contributor gets very little information on readership and access at a granular level. While aggregators remain opaque, contributors, once held hostage to this are now free to contribute to aggregators that package their product and give them clear information on its consumption. On the other side of the coin, consumers have access to information like they never had before via apps and notification services. The aggregator sits in the middle being obstructive.
This opens up the area for a massive disruption in the data aggregators. All of this momentum partially fueled by the need of the consumer. Who needs to go to a terminal to access research content when your other provider also has this research and gives it me in the format I want? The disruptor is giving all the transparency back to the contributor and overnight people question the need for terminals when other providers give the same information, at a fraction of the cost, matching the needs of the consumer and contributor. The apps on your desktop, phone or tablet is now the aggregator and so much more cost effective than the monthly terminal bill!
So where will this end? The point is that it will not. As more and more information is derived of the consumer, from the componentization and big data analytics, some businesses and processes will die and others will be born and thrive. For the medium term, a research system which has all of the items mentioned in this paper already in place and is extendable so that it can embrace new technologies and processes is an absolute must. ANALEC continues to disrupt the existing research technology providers both in-house and off-the-shelf by showing management what will be the norm in the industry in future, but deployable now.
