Fewer and fewer funds attracting more and more of the financial adviser-driven inflows to investment products represents one of the greatest challenges to the sustainability of investment research as a business.
Tim Murphy, a director and head of research at Insight Investment Consultants, tells Professional Planner that, at some point, the managers of funds in outflow will begin to question the value of paying tens of thousands of dollars to research firms to maintain ratings. If those revenue streams dry up, research firms that rely on a manager-pays business model could face a revenue crunch.
“With increasing concentration of usage of managed accounts, and therefore increasing concentration of where funds flow to, you have a smaller number of funds that attract [inflows],” Murphy says.
“You read the 80/20 rule, but I think it’s probably more like a 90/10 rule in this case, in the sense that 10 per cent, or probably less than 10 per cent, of funds get more than 90 per cent of the flow, and everyone else is singing for their supper.
“So, let’s say that’s a couple of hundred funds…running commercially profitably [and] the other 600, 800, 1000, however many, are paying their $25,000 or $30,000 to get rated, despite being in net outflow. I don’t know how many managers are still going to be writing those sorts of cheques in five years’ time.”
Murphy is due to feature in a panel discussion on the sustainability of research at the Professional Planner Researcher Forum in Sydney in December.
The panel will address a range of issues facing researchers – whether stand-alone businesses or the research functions of licensees and advice practices – including the war for talent against other players in the financial services space, and the revenue models that support research.
Murphy, formerly director of manager research, Asia-Pacific, for research heavyweight Morningstar, joined Insight about five weeks ago with a brief to build out the firm’s investment research capabilities to sit alongside its established investment consulting operations, which have run for years under CEO Chris Lioutas.
Murphy says the new research business will adopt a hybrid revenue model, charging managers to have investment products rated, but pitching it at a price point significantly below the current market level.
“It will involve a level of initial payment, albeit that will be materially lower,” Murphy says.
“And there will be a charge to the users of that as well on the other side. The good thing and one of the reasons for me doing as part of Insight is obviously an existing client base to tap into.”
Murphy says Insight is also working closely with financial advisers to help develop reports that are concise, focused, and of practical use in helping them select appropriate investment products for clients.
“I look at all of the research reports at the moment, and they’re all garbage,” Murphy says.
“Ten-plus pages. Does anyone ever actually read any of that? Certainly not all of it.
“Or a 26-page vomit of data which is meaningless.
“What you will see from us is certainly much more punchy, to-the-point, opinionated reports, which anyone who’s dealt with me, and Chris will know that it’s not a surprise.”
