As the global equity research market continues to wrestle with how they will comply with the European Union's MiFID II regulations, McKinsey & Co. has just penned a new study effectively saying they'll have no choice but to fire a ton of equity research analysts who write a bunch of stuff that no one ever reads...which seems like a reasonable guess. Per Bloomberg:
Europe’s impending ban on free research will cost hundreds of analysts their jobs with banks set to cut about $1.2 billion of investment on the area, according to a report by McKinsey & Co.
The consultancy estimates the $4 billion that the top-10 sell-side banks currently spend on research annually is likely to fall by 30 percent as clients become pickier about what they pay for, McKinsey Partner Roger Rudisuli said in an interview. Investment banks’ cash equity research headcount has fallen 12 percent to 3,900 since 2011 compared with as much as 40 percent in sales and trading, leaving the area facing “big cuts” to catch up, he said.
“Two to three global banking players will preserve their status in the new era, winning the execution arms race and dominating trading in equities around the globe,” McKinsey said in a report Wednesday, which Rudisuli helped write. “Over the coming five years, banks will need to make hard choices and play to their strengths. Not only will the top ranks be thinned out, there will be shakeouts in regional markets.”
For those who have managed to avoid this particular distraction, the global equity research industry is in the midst of a major disruption which has been brought on by the European Union’s MiFID II regulations, enforced from Jan. 3, which aim to tackle conflicts of interest by requiring asset managers to separate the trading commissions they pay from investment-research fees.
Of course, the biggest problem with such a regulation continues to be that literally no one knows the true 'value' of equity research, not even the investment banks that are selling it.
Firms are also debating how to price analyst reports, with some firms modeling packages on cable TV subscriptions, running from basic to “all-in” offers, according to the report. Deutsche Bank AG has pitched clients a metered, “pay as you go” approach whereas JPMorgan Chase & Co. has quoted customers a $50,000 flat fee for basis access to fixed-income analysis, people familiar with the matter have said.
“Banks are scrambling to get these pricing infrastructures in place, as well as how they do tracking and invoicing,” Rudisuli said. “They are all rushing to the finish line to be ready in January.”
And perhaps that has something to do with the fact that, as we've said before, institutional clients couldn't care less about the 300 research reports they receive daily (all of which can be boiled down to one simple thesis: Buy The Fucking Dip), but rather only about gaining access to corporate management teams so they can get "color" on upcoming earnings reports.
Another change Rudisuli foresees for the industry is the start of bidding wars for the most valuable commodity banks can offer investors: time with corporate leaders and their star analysts.
“Banks will experiment at first, but over time we could see things like auctions could take a more prominent role; at the end of the day there are only five seats in these meetings,” he said. “The challenge there will be that the people willing to pay the most will be hedge funds, but the preference for corporates will be to meet with only long-only investors.”
Of course, as we've said before, almost any amount of money seems, at least to us, to be too much 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.