Equity research firms are companies that provide research on publicly traded companies and industries. Investment banks, independent firms, or other types of companies own them. This article explains how equity research firms make money through various revenue models.
Two Types of Equity Firms
You can categorize equity research firms into two main types based on how they make money.
- Independent research providers.
- Bulge bracket (institutional) firms.
These types of research companies have different goals and business models. As such, their daily workflows vary subject to client requirements.
Institutional investors are large investment entities. E.g., hedge funds and mutual funds. Likewise, individual investors consist of private individuals or small institutions more beneficial.
The equity research industry serves these two distinct client bases.
Also Read: What is corporate financial strategy?
How Do Equity Research Firms Make Money?
Institutional investors usually pay for investment research services. They have the resources to commission institutional research firms.
Individual investors might get these research services for free from their brokers or fund managers. The investment research complements the fund management services in this revenue model.
However, individual equity research is not free from a financial point of view. The individual investor pays for research services as a percentage of the billed commission charges.
MiFID-II: Separating Fees for Research Services
European regulations in 2018 have made it mandatory to charge the clients separately for fund management and investment research services.
MiFID-II means markets in financial instruments directive. It is a collective term for the European regulations that went live on 3 January 2018.
All asset managers must pay the equity research firms from their P&L (profit and loss) accounts. Also, periodic financial audits are inclusive of these expenses. Finally, bill preparation must note the investment research services fee as a separate billing item.
Equity Research Firms Make Money via Fee-Based Revenue Model
The scope of MiFID-II does not apply globally. It encompasses only the nations in the European economic area (EEA). So, many research analysts (outside of EEA) continue to provide fee-based investment research services.
This revenue model focuses on optimizing the cost of equity research.
A professional equity analyst provides legitimate investment guidance and does not sugarcoat the risk exposure of investing parties.
Equity Research Firms Can Sell Research Reports for Money
Itemization of investment research services is increasing due to MiFID-II and some major brokerage companies. It is an opportunity for equity research firms to rethink their sales strategy.
In this regard, have you observed the components of an investment research report? Equity analysts can monetize such report items as described below.
- Industry research or company analysis (as required).
- Management overview or leadership analysis.
- Historical analysis using financial documents and company fundamentals.
- Financial modeling from the above three components.
- Financial forecasting extends the developed model.
An equity firm charges a fee when selling such investment reports.
A fund managing institution integrates this research into its services as a free add-on.
European research firms will itemize the research components and bill the fulfilled research items separately. The fund management commission will appear as another billable item.
Conclusion
Equity research firms make money through report-based fees or brokerage commissions. Their revenue model varies as per their scale and scope of work.
Some research firms serve individual investors, while others help hedge funds or pension funds.
MiFID-II has redefined how equity firms charge their clients in EEA. Furthermore, the resulted itemization of research components unlocks new frontiers for cost optimization.
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