Investment research has been a key part of Wall Street for decades, and thousands of analysts are employed by hedge funds, brokerages and other financial institutions to undertake research for their firms and clients. However, the industry will be in for a sea change and smaller, boutique research firms may be a vanishing breed when a new EU law is fully implemented.
New models for research analysts
Traditionally, analyst research has been paid for by commissions that clients pay every time they buy or sell shares. However, a new European Union law will require investment managers to themselves pay for any analyst research or services they receive.
Moreover, given that many large global money managers are already following the proposed rules, investment banks in both Europe and the U.S. are scrambling to develop new business models for one of their key functions.
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Marketplace for investment research
A number of major banks are working with clients to assign pricing for analyst research, according to bank executives who spoke to the Wall Street Journal. They note that prices for research will likely range from $50,000 to millions of dollars for custom research and 24/7 access to analysts.
UBS has already begun offering research and access to analysts for fees that depend on the analyst’s popularity and the sector. According to Barry Hurewitz, COO of UBS’s investment research division, the most in-demand analysts can command prices that are four to five times higher than their less popular peers,
“We’re creating a marketplace for our analysts,” Hurewitz noted. “We’re auctioning off everybody’s time and [price] moves around depending on what’s valuable.”
This kind of business model is problematic, creating the major issue of the most influential analysts, whose comments can move stock prices, giving early access to the highest-paying clients.
New EU rules likely to reduce size of research industry
According to the WSJ, industry execs said the proposed EU rules will probably lead to a major scaling back of banks’ investment-research divisions. A few execs noted that some banks and brokers are already considering cuts among their less popular analysts and research teams.
“You’re going to see some of the banks exit this business outright or rethink as to whether they need a team of 13 or 14 covering a sector,” commented Neil Shah, a director at Edison Investment Research, who charges fees to the companies it covers.
Shah noted that the changes will help level the playing field between his business and major investment banks. He also noted that he has heard that independent research houses that sell research directly to investment managers are worried that clients will spend less on research and reduce the number of providers.
Regulators in the U.S. have been worried that banks’ high-paying clients are getting privileged information, and have levied fines over on a number of banks over alleged violations. Back in 2003, 10 securities firms settled with regulators over claims that analysts “tailored” reports and stock ratings to get business from investment banks.