Research houses in Australia have traditionally enjoyed the benefits of genuine barriers to entry regarding competition in their market. The dominant research houses in Australia have recently diversified into investment consulting and portfolio solutions – essentially becoming product manufacturers in their own right. This combined with structural changes to the industry regarding vertical integration, potential consolidation of Super funds, the rise of managed accounts and the unwinding of commissions in many legacy products will bring a raft of differing pressures to this space in the short and medium terms.
The range of investment and super fund research providers has been relatively static over the last few years. The huge range and diversity of product manufacturers and the extensiveness of approved product lists used by licensee groups has created a genuine barrier to entry for new research providers who must generate decent coverage before being taken seriously. This is even more the case in Australia which has a particular love affair with deep qualitative research that is expensive to replicate.
The anticipated consolidation of super funds, fuelled by a more aggressive regulator APRA and a raft of Productivity Commission recommendations from their superannuation efficiency review released in Jan 2019, is likely to put pressure on the super fund research houses in the medium term to tighten their commercial models to accommodate a lower volume of clients, seek alternative business services or consider M&A with the investment researchers.
The three major investment research houses Lonsec, Zenith and Morningstar have the greatest product coverage and their research continues to be relied upon by the majority of licensee groups. However, the explosion of ETFs and managed accounts / MDAs are requiring research houses to expand their research coverage and deepen their analysis to look-through these structures to determine differentiation and uncover strengths / weaknesses.
Regulatory Change Creates Rejuvenation Pressures/Opportunities
The necessary unwinding of embedded commissions in many legacy products driven by the removal of grandfathering is challenging asset managers to review their overall product suites and consider the retirement of some products, the renovation of others, and introduction of completely new solutions reflecting contemporary adviser needs. This may represent both risk and opportunity for research houses as potential new ratings may be offset by cancellation of ratings in other areas.
The recent regulatory focus on commissions, conflicted payments by product manufacturers, and the favouring of investment products built and distributed by the owners of the vertically integrated businesses may actually be a boon for independent research. With these long-established conflicted constructs being gradually dismantled, it should mean that there is a more level playing field between products of an equivalent quality and therein more inferred value in the ratings that distinguish this quality. This will only be true if the rules and processes within licensees and platforms that sit behind construction of approved product lists and model portfolios are also “spring-cleaned”.
Moving With Tech
Increasingly the research and ratings from research houses are being embedded into the leading 3rdparty financial planning software solutions in more sophisticated ways than the past, including into workflows and decision trees within licensees to strengthen compliance frameworks and create audit trails around adviser product review and selection.
Fee pressure throughout the wealth value chain will be impacting research houses, particularly given the high fixed costs these businesses have to maintain to ensure wide product coverage and ongoing surveillance. This will be exacerbated if research houses are on the wrong side of the ledger following the product renovation trend described earlier.
Research houses have over recent years aggressively diversified into investment consulting, portfolio solutions and becoming a fiduciary, essentially becoming product manufacturers in their own right. This once again raises long-simmering issues about whether the research houses are competing directly with their fund manager clients.
The host of structural changes described above and the continued evolution of both product preference and the role of the Research Houses themselves is creating both challenges and opportunities for this segment of the industry. Continued fragmentation of the licensee market, which is yet to find it’s “sweet spot” in terms of service and scale, means any extended role for research houses, particularly regarding product manufacturing and consulting, is yet to be solidified.
The concomitant nature of the many segments of the financial services industry means that the future role of research houses, much like other parts of the financial services landscape, remains uncertain until the industry is able to work through its current upheavals to find stability and stasis.
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