(Bloomberg) -- The doom and gloom surrounding a new European rule that is broadly expected to upend the way equity research is bundled with brokerage services does not worry Ed Wolfe, the founder of boutique firm Wolfe Research. In fact, he believes the regulations can sharpen the edge of his mid-sized firm in the long run.
As investors and money managers, who are already looking for reasons to delay and defer payments in a difficult and low-volume environment, grow even more selective about what they pay for in a post-MiFID II world, Wolfe is betting that equity research from its slew of top-rated analysts will help it buck the trend.
"Being good is not good enough" to crack it as an analyst, Wolfe said, noting that several analysts at his firm hold stellar ratings from Institutional Investor, a finance magazine whose annual rankings are widely followed on Wall Street. Wolfe typically tries to hire up to three top-rated analysts every year, through a process that he said can take multiple years and several conversations.
While the long-term prospects are encouraging, near-term growth is another matter. "We came into the year thinking that our revenue will be up 30 percent to 40 percent, and we will probably be up 25 percent to 30 percent," Wolfe said in an interview in New York. Still, he expects the firm to vastly outrun the broader industry. "I think the commissions for most of the Street are going to be down at least 15 percent."
Pricing debate
The European Union plans to roll out the revision to the Markets in Financial Instruments Directive, or MiFID II, at the start of next year and financial markets and stakeholders on both sides of the pond are scrambling to understand and predict the consequences. A huge part of that debate centers around how and at what point to price the research.
Technically an European regulation, MiFID's rumblings are expected to be felt by financial institutions in the United States as well. Wolfe expects rules similar to MiFID to ultimately get adopted in the U.S.
"It is not just because some large firms are global, but because it is the right thing for the industry," he said. One of Wolfe's hedge fund clients, which does not have any exposure to Europe, has already taken MiFID as an opportunity to look into its research spending and roll back expenses.
A-la-Carte Research
Wolfe expects the biggest banks to eventually provide research as a-la-carte offerings, with price determined by the clout the analyst wields. Wolfe itself is open to such a strategy. "We are willing to charge per analyst, we are willing to charge per industry," Wolfe said. He declined to provide any financial terms on pricing, adding that the firm is "too small to set the price."
Wolfe Research employs 17 analysts who publish research, sometimes with teams of up to six associates working under them. The firm's research spend has risen exponentially from a small base in 2009, while similar spending at global investment banks has fallen more than half over the same period, according to a white paper from Bloomberg Intelligence, Edison Investment Research and Frost Consulting.
While the big banks' plans to make their research stand out remains to be seen, several have already started tackling the pricing question. Danske Bank A/S is planning to give away almost all of its research for free, while JPMorgan Chase might charge $10,000/year for read-only access to its research. Barclays has proposed a $39,000 fee for a similar package.
"MiFID will be difficult for everybody for the next 18 months to two years. I think the winner will be those that have figured out how to price research and have differentiated research that clients want," Wolfe said.
To contact the reporter on this story: Esha Dey in New York at edey@bloomberg.net.
To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Courtney Dentch
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