Equity research hiring has picked up. After painful redundancies at the likes of Nomura and RBS, equity researchers have suddenly come back into fashion. Equities revenues are up, banks are reportedly starting to think they’ve over-fired their research professionals. Equity research recruiters are starting to get a tiny bit excited.
It won’t last. If there is one job in investment banking that’s like a bungee jump with perished elastic, it is equity research. Researchers have been tossed over the cliff many times before and have always bounced back, but their elastic is looking a little tired.
“If you’re looking for a class of bank staff that’s in danger of extinction, then equity research would be near the top of that list,” say Simon Maughan, head of the sector strategy group at Olivetree Securities. “There’s massive pressure on asset managers to cap their research budgets. In the long term, managers will pay a lot less for research and far fewer equity researchers will be needed.”
In the UK, this latest cliff drop is being orchestrated by the Financial Conduct Authority (FCA), previously the Financial Services Authority (FSA). Last November, the FSA published a research paper on conflicts of interest in the asset management industry, including a section on paying for research, where it complained that “too few firms adequately controlled spending on research and execution services.”
“The regulator has a very pointed campaign to pressure asset managers into cutting research spending,” said Maughan. “The proportion of commission fees going to research is only going to fall further.”
Chris Wheeler, a director at Mediobanca in London, agreed that the equity research business is tough and getting tougher: “As more and more trading goes electronic, it’s becoming increasingly difficult to be paid for equity research, unless it is differentiated. Each asset manager has a limited commission pot and is going to be a lot more discerning about how they allocate it.”
Falling corporate finance fees are also nudging researchers towards the cliff edge. U.S. banks were banned from cross-subsidizing research with IPO fees in 2003. However, this week, New York Times’ Dealbook suggested the practice is making a comeback and documents published in a recent Credit Suisse court case showed that the Swiss bank’s equity researchers were paid on the basis of assistance provided to the equity capital markets team.
“Fees in capital markets and ECM are also being squeezed, so you’re going to see less of a cross-subsidy from there too,” said one senior equity researcher. “Net, net this profession is becoming a lot more difficult and a lot less lucrative. I don’t like to think about it,” he added.