How much is bank investment research worth? There are obvious examples of great work on a consistent basis, such as calling a flash crash or dissecting volatility with stunning insight. But there are also the cases when bank research is all consistent in ignoring essentially the same performance drivers, as was evident in bank analysis of the Petrobras 100-year bond offering. With certain bank research ignored or overlooked by clients, a McKinsey & Co study, first reported in ZeroHedge, is interesting to note. It predicts mass layoffs of brokerage research staffs as, when asked to pay for the deluge of largely bland research reports, institutional investors say “no mas.” But will there be a larger test of the bank’s real influence as it fights to keep what is an important tool to influence investors but also shape policy? And ask what is bank research value in terms of numbers?
Is Credit Agricole bank research value of 400,000 euros?
Are hedge funds and other institutional investors willing to pay 400,000 euros, or over $450,000, on an annual basis to receive research from Credit Agricole? Those looking for the “Uber pool” version might only pay the bank 170,000 euros with the stipulation they can’t speak to the analysts.
With hedge fund performance faltering and bank research flooding the streets, making the hunt for unrecognized stock values more competitive, the industry stands at an inflection point.
Isn’t research a core point of differentiation among hedge funds? Do they need bank research? Or will institutional investors pay the bank’s demands because they don’t want to threaten their relationship?
What is the Bank Research Value that is broadcast among a wide variety of institutional clients?
On the surface, the ability to receive a research perspective that is also broadcast to the world of the bank’s varied customers causes the value of that information to diminish the more common it becomes.
Justifying such a large research expense while underperforming a stock market benchmark might be viewed as unnecessary, particularly as services that track the ultimate success of research show, at best, wide gaps between the best and the rest.
Those who view multiple bank research reports likely know that in order to gain a full picture it might take research from several banks and independent providers to cover all angles.
In reality, what was until recently a matter of spreading around commission dollars at the largest brokerage firms to obtain their research has now become a major expense, with Nomura appearing to come in at the low end of the range by offering a 134,000 euro research package.
Using “soft” dollars for research — a practice banned in certain situations when dealing with retail investors — is now changing in Europe thanks to coming MiFID II regulations. Starting in early 2018, no longer will a hedge fund or institutional investor be able to simply throw around commission dollars – paid for by the fund’s investors. Hedge funds must actually devote real money to the research, which changes the decision parameters.
In predicting the decline of bank research, many think this value proposition is the test that matters. But other factors might influence the decision as well.
Are big brokerages selling trade execution or access to an elite club?
There is a significant reason bank / brokerage firms might want to see their research arms succeed. Not only do they provide a perceived benefit to brokerage customers, but it also provides the banks a method to distribute detailed policy positions that are often closely watched by those inside government. In essence, the bank research has a stealth policy influencing benefit.
The large banks are likely to try and figure out a way to keep bank research value and brands going, even in the face of large-scale cuts to current staff, some of whom only produce reports once per month.
The large brokerage firms at times are known to subtly sell the notion that customers are inside an elite “club” of sorts – a notion once discussed in Tabb Group research and highlighted in movies such as The Big Short – and use this as a method to influence institutional investors.
With bank research threatened by a competitive revenue model, research departments could, themselves, slim down and become more elite – shedding research that isn’t unique, meaningful or does not influence the desired target. But the high percentage probability path is that research will remain at banks if for no other reason than research serves multiple strategic objectives at a bank.