The Financial Conduct Authority (FCA) in the UK is challenging the status quo for research in the equities markets around the world. The buy-side (an analog for the individual or retail investor in the institutional money management space) is needing to re-think how they pay for research to aid them in their investment decision making process. As the article “Explicit research pricing poses challenge for industry” from the leading buy-side news source The Trade News states – the “biggest problem in research provision today is a lack of explicit pricing, due to the bundled model, which has been commonplace”. It is an important component of the entire investment and money-management process to understand the costs associated with making not only investment decisions but also trading decisions.
The costs for many forms of research today are bundled into the commissions that are paid for stock, options and other commodities transactions. By un-bundling these costs – the price that is being paid for pre-trade decision making process versus the actual cost to transact in a given instrument becomes more transparent. While it is not critical to an individual investor or trader to know the explicit costs of research; knowing that there are many things priced into the cost of commissions can help in understanding the complete cost (or value) of a trade.
Understanding the costs and benefits of research can also aid the institution and individual in assessing the value of adding an independent research service to their investment and trading decision making tool-kit. These independent firms in addition to providing a means to explicitly know research costs can also hold neutrality in the forefront and provide a significantly expanded or extended research data-set to the research that is already bundled from the broker.