Unbundling of Research costs from commissions could benefit Investors and Traders

Unbundle Research CostsEarlier we wrote of the changes beginning in the UK by the FCA to highlight the true costs of research for buy-side firms (which is also true for individual investors and traders).  Today we look at a similar story but from a different perspective – how will this unbundling potentially impact brokers and their research.  Once again a leading industry new source The Trade News provides a critical starting point for our discussion in their article “Unbundling a threat for sell-side models“.  In their article they make 2 key points:

  1. In the business model where research costs are bundled into the commissions you pay more as you trade more; however, there isn’t necessarily more research acquired.
  2. Unbundling of research fees could increase or highlight competition between research services (both external firms and research departments within brokerage firms).

Let’s tackle the first point. This is a very interesting insight in that as a firm or individual trades more frequently in stock ABCZ they are progressively charged more (due to commission costs with the research fee bundled in) and yet they receive no further value from the research for stock ABCZ.  The trader, or investors very first trade maximizes their fee for research in ABCZ and each additional charge for research bundled in the commission cost is not additional value to the investor. This is not reason enough to discard the bundled fee model as the true value of research or a piece of research may only be recognized over the cost contained with in many commissions.  From a cost transparency and value assessment perspective it is important to understand this relationship between research and commissions.

This value assessment thought process leads us to the second key point from the article.  This point that the unbundling of research fees from commissions could “create a competitive research market and ensure firms that would not survive in such a market are not able to keep on going due to the broken commission payment model.” Looking at this thought in detail we can see that this unbundled model will bring to light that their are some brokerage firms that are including a fee for their research within their commission structure that are not providing a full value research service.  Additionally as mentioned in the article the transparency in price for research provided by unbundling could help traders and investors better assess independent research firms and become more capable at the price level of comparing price v. research quality and thus understanding the true value received.

The concept of unbundling is not new.  There was a large evolution in the brokerage and financial world when broker commissions were changed in the late 70s and early 80s.  We may again be on the cusp of change in the industry which will allow competition to help traders and investors from institutions as well as individuals receive greater value for their investment dollar while also empowering them to find the research that is most critical to their success in the markets.