The life of an investment banking equity researcher has been increasingly perilous since the financial crisis hit. Analyst numbers have halved to 9,000 since 2007, while the job itself – once supposedly a refuge for the intellectually creative in banking – has become more about short-term notes to encourage trades than genuine value-add research. For a select band of senior analysts the solution is a simple one – go it alone.
“Research departments have been stretched ever thinner, to the point where you have to call hundreds of people a month, and the main idea is to keep the salesforce happy and create some trades – there’s little incentive to write in-depth research,” says Marietta Miemietz, former head of pharmaceutical research at SocGen who now runs her own research boutique Primavenues.“It really does feel like factory nowadays, rather than a creative, intellectual role.”
Investment banks have struggled to hold on to top-ranked analysts, who have moved across to the buy-side, seeking both better job security and bigger pay packets. However, a braver route for some and – perhaps, thanks to new rules from the Financial Conduct Authority, a more lucrative and interesting role – is to go independent.
Investment banks have traditionally showered the buy-side with research notes in the hope that they will pay for the research or, more likely, trade through them and help them grab a larger slice of equity commissions. But, at the beginning of June the UK’s Financial Conduct Authority introduced new rules stating that asset managers will only be allowed to spend their clients dealing commissions on “substantive research”, meaning they have to detail exactly what they spend on equity research to the regulator.
For the large banks, which have also earned money through payments for so-called ‘corporate access’ – namely equity researchers helping set up meetings with company managements – this is bad news. According to estimates from Edison Investment Research, this could mean research commissions fall by 10-15%. However, independent firms are hopeful it could also benefit them and spur demand for meaty research that is supposedly freer from potential conflicts of interest.
Andy Howard was head of Goldman Sachs’ GS SUSTAIN research team until July last year, but has just received FCA approval for his independent firm Didas Research.
“The FCA’s focus on research payments opens the door; rather than commissions going to the guys executing the trades, I’d anticipate their being a much less monopolised environment, where there’s more room for independent firms,” he says. “Investment banking research is changing and there’s greater demand for more in-depth, longer-term focused information. It’s easier for us to innovate, and we’re nimbler without the same large cost-bases of the big firms.”
The problem for investment banks is not only that they’re under pressure to shrink their research functions – or at least do more with less – but that internal politics is hampering significant change.
“The way the buy-side interacts with investment banks’ equity research departments has really changed and banks also haven’t worked out how to monetise it,” says Miemietz. “There needs to be some structural changes to banks’ approach to research, but because it’s become more marginalised, heads of research are not empowered to bring about change.”
However, the difficulty in deciding exactly how to price equity research, together for a tendency to pay via a “soft rather than hard dollar commission structure” is still a problem for most independent firms, says Cyrus Mewawalla, a former Nomura analyst who now runs his own equity research firm CM Research.
“All independents follow the Steve Jobs ‘build it and they will come’ model, but because independent research is still nascent and most firms don’t really know what the buy-side wants or how much they’re willing to pay for it, it’s difficult to define the scope of the product. But that will change very quickly once the big banks are forced to price their research product,” says Mewawalla. “The main difference is that our research is independent and unbiased, and trust is increasingly a critical issue.”
Nonetheless, Mewawalla believes that the FCA’s move is likely to be echoed by regulators around the world and this would mean even greater potential for independents to gain ground. This, together with a consensus that research teams will continue to get smaller in large investment banks, could mean the emergence of other research boutiques in the near future.
“Once banks decide how to price research they will realise whether they’re overstaffed or have a need to hire. The chances are that they’ll cut more people,” says Mewawalla.
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