We wrote recently on why savvy investors should eschew Wall Street research and make independent research a cornerstone of their investment strategy. Here, the Financial Times provides yet another reason for you to avoid investment banking research. The big banks are slashing research staff because they don’t generate enough profit for the banks. The trend is expected to accelerate as incoming EU regulations will require money managers to pay investment banks directly for any research they consume instead of using their client’s commissions. This is likely to be a punishing blow to investment bank research departments. The likely implications for investors are less coverage and even more conflicted research which will further decrease its usefulness.
If you are still relying on conflicted brokerage research to manage your portfolio, now is the time to seek out a source of independent advice.
The ranks of investment bank research analysts have fallen by one-tenth since 2012, as tighter regulation and falling profits have forced financial institutions to cull their brigades of economists, bond strategists and stock pickers.
The number of analysts working at the world’s 12 biggest investment banks fell to 5,981 last year, according to fresh numbers from Coalition, a data provider on the industry. That is down from 6,282 at the end of 2015, and 6,634 at the end of 2012, when Coalition began to collect the numbers.
The cuts are expected to deepen in the coming years. “We will have massive cost pressures in an industry that is not ready for it at all,” said Matthew Benkendorf, chief investment officer at Vontobel Asset Management. “They’ll have to gut things pretty hard.”
The profitability of “sellside” research has been eroding ever since dotcom bust, when allegations of biased research led to tighter use on the rules around using analysts to drum up investment banking business. Then, after the financial crisis, newly cost-conscious banks started slashing staffing of research departments, because they made little direct contribution to earnings.
Incoming EU regulations are expected to deepen the research cull, because money managers that operate in the region will be required to pay banks directly for any research they consume. Currently, research is largely funded through commissions on trades. Some asset managers are therefore bulking up their own analysis departments and many plan to cut spending on outside research.
Read more here.
Jeremy Jones, CFA
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