For the past couple of months, we've frequently shared our views that Europe's MiFID II regulations, which force investment banks to charge for equity research instead of "giving it away" in return for trading commissions, could be a wake up call for 1,000's of highly paid research analysts who were about to have their true 'value add' subjected to a market bidding test. Here are just a couple of examples:
Now, per a note from Reuters, it seems that a growing number of equity research analysts are finally waking up to the fact that hedge funds don't really have a burning desire to drop $400,000 per year on reports drafted by a 23-year-old recent college grad that do little more than summarize free SEC filings. Who could have known?
Having covered financial stocks at big and small banks for more than two decades, David Hilder was accustomed to the ebb and flow of Wall Street job cuts and hiring sprees.
But he threw in the towel as an analyst last year after deciding customers simply will not pay what it costs to produce research in the years ahead, especially after a regulation called MiFID II upended the pricing model.
“It certainly seemed that the difficulty of being paid for research was going to increase, not decrease,” said Hilder, who is now trying to reinvent himself as an investment banker.
Many share Hilder’s grim outlook. Reuters spoke to dozens of current and former analysts who moved to independent research shops or investment firms, joined companies in industries they covered, or have launched new careers or are considering doing so, after nearly a decade of cost-cutting that is likely to accelerate under MiFID.
Not surprisingly, a study from Frost Consulting recently found that major global investment banks have slashed their equity research budgets by more than half, from a peak of $8.2 billion in 2008 to $3.4 billion in 2017. And, as we noted back in the summer, McKinsey & Co. thinks the pain is just getting started and that banks will 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.
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.”
Meanwhile, in light of the MiFID II writing on the wall, Evercore ISI analyst Glenn Schorr admits that his research has become a bit morbid of late...
Evercore ISI analyst Glenn Schorr recently titled a research note “Writing My Obituary,” with a follow-up called “Stay of (my) Execution.”
“For the last few years, it’s been all about morgue humor like ‘flat is the new up’ and ‘no bonus, but at least you get to keep your job,'” said one former analyst who recently left a large bank but would not be quoted by name to avoid upsetting former or future employers.
“Contrast that with Silicon Valley,” he continued. “It’s not even the money; it’s the optimism that I envy. Those guys are building a brighter future and this just feels like death.”
Sean McGowan spent 25 years covering consumer stocks at small and mid-size brokers before losing his job early last year amid broad cost-cutting.
“The more I started to do research on the impact of MiFID and what was likely to happen to the industry, the more I realized that going back to that world would be like swimming upstream,” said McGowan. “A lot of the jobs on the sell-side are going to disappear and inevitably some of the more enjoyable parts will be peeled back. I don’t want to haggle someone about the price of a phone call.”
Of course, the inevitable result of these changes is that the world's hedge funds will have employ their "buy the fucking dip" strategies without the support of 50 research analysts...maybe just 20 instead.