As this new story from the FT shows, the genie is out of the bottle when it comes to the effects of MiFID II on the research market. Whatever compromise is finally reached by the European Commission, clients have already started to unbundle their payments for dealing and research (the article doesn’t emphasise this, but it’s noticeable that the trend is happening outside Europe too). When we speak to investors, we hear that research payment budgets are being cut by as much as 75% on a global basis, and the FT’s enquiry backs up the idea that the budgets will be decimated.
The only way that any research team is going to survive is by cutting costs substantially. As the FT article says, there are, for example, 73 teams covering the European banking sector. That means over 200 analysts, most of them making six figure salaries and occupying some of the world’s most valuable real estate. The only way that sort of cost base could ever have been remunerated was during the days when European cash equity commissions were 30bp and higher.
The modern business model for equity research is the “star plus support” system. You have a small number of high profile analysts, who spend their time on the road meeting companies and clients. And then you have three or four juniors, who make the models and write up the investment ideas generated by the star. This frees up time and energy for the head of the team, and allows him or her to produce written product and maintain client coverage.
The trouble is, when revenues fall, what do you cut? The labour market for star analysts with a good personal franchise is always tight; you can’t pay them down or they will leave. So heads of research confronted with the need to cut costs will tend to do so by reducing the headcount in their support teams. But this undermines the whole model – if you cut the juniors, then the top analyst needs to do more of the lower value-added work, which reduces productivity and revenue generation.
For the price of a single graduate trainee, Frontline Analysts can provide two or three top quality Indian MBAs, working European hours and producing models and research notes at the level of a second year associate. It’s a model which we’ve proven over the last 11 years – our employees are writing and calling clients every day for some of the world’s biggest banks. Our Indian employees are also supported by City veterans based in the UK, to make sure all their work is commercial and relevant to your franchise. So if you’re a star analyst who has just been told that you’re losing some of your juniors, you might want to ask your Head of Research to drop us a line.