AI, research as content and the future of payment: thoughts from Unbundling Uncovered London 2023

Last week representatives from around the investment research industry gathered in London once again for Unbundling Uncovered – the biannual event exploring the most pressing issues and opportunities facing research providers and consumers.

Shortly after everyone last met in the summer, the SEC’s no-action letter expired, and as legislation in the UK and Europe evolve, the impact of the Kent Review becomes clearer, and the rapid development of AI continues to reshape the landscape, there was plenty to discuss.

The Kent Review

A big theme was ongoing regulatory change and the post-MiFID II landscape, focused in particular on the Kent Review and its predicted impacts on the research market in the UK and across the world.

Of particular interest was the Review’s finding that small and mid-cap research has suffered more than the big players as a result of MiFID II, and that this has a negative impact on retail investors in particular. They need better access to content, but will also require a different kind of support from institutional investors.

Panellists across the day broadly agreed that the Edinburgh Reforms and the recommendations of the Kent Review will be beneficial for the industry, and appreciated the centering of industry perspectives in the Kent Review. But there are concerns about how the recommendations will be implemented and resourced: the starting point is good, but what will the new system be like in practice?

Unbundling or rebundling?

The SEC’s no-action letter has finally expired, and ongoing regulatory discussions in the UK and EU raise the question: are we heading back towards a bundled approach to research? Panellists broadly agreed that yes, research costs will be bundled into trading commissions, but challenges remain. 

It’s unclear who will pay in this rebundled environment – will the buy side ask asset owners to once again pay for research? This tricky conversation was evoked throughout the day. It’s also not evident what will be included. Corporate access was a recurring example of this problem because it is becoming a significant part of the advisory proposition, but occupies a difficult position (not included in the UK, included in the US). Greater clarity on what constitutes investment research is needed.

Finally the upheavals of rapidly evolving AI technologies might spell further trouble for smaller providers: new formats, faster production for certain types of research and the broadening of the research category are all trends which might make competition yet more difficult – and that’s bad news for investors.

New expectations of research

Numerous panels highlighted two key strands of the buy side’s evolving expectations when it comes to research: the renewed importance of corporate access, and the demand for personalised content. 

Corporate access has risen sharply in the past year, particularly through the format of face-to-face conferences. This trend is driven by a more proactive buy side: people are taking it upon themselves to book meetings rather than waiting for larger events.

In fact, many noted that there’s an overall trend towards pull (ie, buy side proactive demand) rather than push (sell side sending out products/services) across research and corporate access as a whole.

With data growing in importance and the new influence of AI, more research products are available than ever. In fact, in the case of data, the supply is practically unlimited. Panellists said that under conditions like these, sales and research must be more active in curating personalised insights for their clients. Spray and pray is definitively over. And when it comes to measuring and valuing this personalised research, interactions capture remains essential.

Generative AI

New AI-backed technologies are set to fundamentally change the way the research market operates, and much of the discussion turned to how this will play out in the near future. Panellists agreed that AI will play a role in research production soon, initially providing maintenance coverage. 

Areas of biggest impact for AI are set to be discovery, delivery and consumption. Natural language processing (NLP), large language models (LLMs) and atomisation will transform how the buy side interacts with research content, and providers who understand and harness those tools early will get a competitive and informational advantage. 

Accordingly, for the sell side, the impact of AI will initially be felt in three key areas: driving operational efficiency, improving and personalising client service, and delivering better investment insights.

Conclusions

So what does this all mean? It’s clear that the trajectory of investment research regulation is towards rebundling, but at the same time, market participants have really valued the improved transparency between asset owners, corporates, sell and buy sides which is likely to be the most important legacy of MiFID II, especially given the more volatile state of the markets. Even if payments go back to being bundled, this transparency will persist – we will not return to the way things were before. 

The emergence of new technology tools means that both providers and consumers are ascribing value to delivery mechanisms which help them extract actionable investment insights from content. For the moment, the future looks bundled, more transparent, more personalised, and supported by emerging AI tools. There’s work to be done, and it will require trust on all sides, but there was a sense of hope, even excitement, about the trajectory.