New Rules Force Banks To Charge For Research; Hedge Funds Push Back: "We Won't Pay For Crap"

What if we were to tell you that for the bargain basement price of just $10,000 per hour you could buy yourself the privilege of a 1-hour conversation with an equity research analyst from a top-notch investment bank, would that be something that might interest you?

While we hate to be overly pessimistic, we're gonna go out a limb and guess that most of you answered in the negative to our question posed above.  Unfortunately, at least for a bunch of research analysts in Europe who either (i) actually believe their time is a bargain at $10k per hour and/or (ii) simply require that much to justify their existence to their employers, that is exactly what investment banks in Europe are proposing to their buyside clients.

As the Financial Times points out, European investment banks are locked in a heated negotiation with their buyside clients at the moment over exactly how much they should be able to charge for equity research services.  The discussion has been prompted by a new regulation, known as Mifid II, which will go into effect in 2018 and require i-banks to break out the pricing of equity research charged to buyside clients, which up until now had been provided 'free of charge' but effectively covered by trading commissions.

The tense discussions over how much analyst research is worth have intensified since the start of the year as the investment industry readies itself for the introduction of new European rules, known as Mifid II, in 2018.


The rules will force fund companies to explain clearly to investors how much of their money is spent on research. Previously research was sent to fund managers for free in return for the business asset managers provided to banks and brokerages when they placed trades. The cost of the research was included in the price of trading.

Unfortunately, there seems to be a pretty wide bid/ask spread between what research analysts think their services are worth and what their buyside clients are willing to pay.  In fact, a recent survey of fund managers by consultancy Quinlan & Associates found that analyst headcounts at banks would have to fall by 30% by 2020 in order to eliminate all of the costs that funds simply wouldn't be willing to absorb (a.k.a. the "crap" as one fund manager put it). 

“The figures are all over the place at the moment. Some [quotes] are fair and reasonable, and [with others] we thought: there is no way we are paying that — they will have to recalibrate their business models or part ways with us altogether.”


“This is the biggest problem,” he said. “It will cause a lot of problems in 2018 because no one has worked out how much the research is worth.


“There will be a lot of c**p that clients won’t pay for and that is when the big cuts [to the analyst workforce] at the global banks will come. The feedback from many [in asset management] is that the price of research is too high and not granular enough.”



Meanwhile, with banks looking to charge each client $300,000 - $500,000 per year for their equity research alone, it's the small asset management funds that will be shut out of the market. 

The head of a boutique fund company, which has a yearly research budget of £1.1m, said brokers were now asking for $300,000 for an annual subscription to their research. “As a global house covering emerging and global markets, you might need a dozen brokers. That’s a huge bill,” he said.


“For smaller managers this is a big problem. They just don’t have the scale to put a cheque of that size through. We had one broker say it might be $500,000 [to access their research annually], but that’s a nonsense starting negotiation position.”


Brijesh Malkan, a former Legal & General fund manager and senior consultant at BCA Research, an independent research provider, said some of his clients have been asked to pay up to $10,000 for phone calls with top bank analysts.


Banks have also requested a $30,000 annual fee to provide an individual with access to their research platforms, and up to $10m to provide a fund company with the same level of access across its workforce, according to Mr Malkan, who has more than 2,200 fund management clients.

But, while equity research analysts may like to think their time is invaluable, real life comps would seem to paint a slightly different picture with CLSA just announcing today they will be shutting down their U.S. equity research efforts "driven by declining revenue."

Today, CLSA Americas CEO Rick Gould announced changes to CLSA’s equities platform in the US. Going forward, CLSA will pivot its US domestic equity broking business to focus on execution services and trading.


Driven by declining revenues in equity research and increasing investor demand for low-touch, best-execution strategies the changes announced today will impact US domestic research, sales, trading, corporate access and associated support staff.


CLSA Americas will continue to offer its current full suite of execution and trading services, including sector trading, ADR trading, portfolio trading, electronic execution and commission management to provide clients with best execution globally.


CLSA Americas has one of the largest Asia-sales teams of any brokerage operating in the United States and will continue to offer Asian research and global execution services to US clients. Asia sales and Asia trading teams located in the US will not be impacted.


Since 2009, CLSA Americas has built an outstanding equity research platform with some of the best analysts on the street. Our focus has always been to provide US and global investors differentiated insights on US stocks. While we succeeded in this regard, the economics of providing US equity research have become increasingly challenged. Our focus now, is to continue to provide our clients access to liquidity and best execution.

Of course, at least to us, this all seems like an awful lot of money to spend to have the same people give you the same advice over and over again, namely "buy more stocks, faster."  There, we just summarized 90% of all equity research that will ever be written for the rest of history in 4 simple words and completely free of charge.  You're welcome.