Investment banks have been chopping equity research headcount, but they're still willing hire a star analyst when they're available. The result of this is that the typical structure of a research team is now a top-ranked analyst supported by a team of juniors. Anyone outside of this elite status has struggled to remain employable.
A case in point of asset managers' willingness to pay for quality research (but little else) is illustrated in the FT. Asset managers are willing to shell out $10k for a single phone call with top bank analysts, according to Brijesh Malkan, a former Legal & General fund manager who is now a senior consultant at independent research provider BCA Research. However, as MiFID II looms next year, it appears that banks have no idea about how to price their research.
Some banks are offering full access to their research for $10m to a large asset manager, but $30k to an individual. Others are charging $300k for an annual subscription, but Benjamin Quinlan, the former head of Asia-Pacific equities strategy at Deutsche Bank and chief executive of Quinlan & Associates, believes this is a "bait and hook" strategy that will increase once a fund manager signs up. Banks are also changing the price depending on the size and spending power of the client.
“This is the biggest problem,” he said. “It will cause a lot of problems in 2018 because no one has worked out how much the research is worth."
“There will be a lot of c**p that clients won’t pay for and that is when the big cuts [to the analyst workforce] at the global banks will come. The feedback from many [in asset management] is that the price of research is too high and not granular enough.”
Asset managers continue to cut back on external research costs and are investing more in hiring their own research staff. One question, therefore, is which will end up being the most economical and most useful. It may be that banks' main clients end up being smaller asset managers who can't afford to build their own research teams. This in itself is a problem. One boutique firm said it had a £1.1m annual research budget and was being charged $300k by one broker.
"As a global house covering emerging and global markets, you might need a dozen brokers. That’s a huge bill," said Malkan.
Then there's the fact that many senior analysts have had a enough of the cuts and are refusing to join big banks. Instead, independent research houses, such as TS Lombard, that offer profit sharing arrangements, flexible working and the opportunity to work on higher quality projects have been hiring them.
Separately, Deutsche Bank's bonuses may be smaller than first feared. The bank is set to cut its bonus pool by 80%, according to reports in Frankfurter Allgemeine Sonntagszeitung relayed by Bloomberg. Chief Administrative Officer Karl von Rohr said that he released that this would be "frustrating" for employees. As reported previously, this will affect around 25% of staff, but around 5,000 will be offered a special long-term incentive. However, he also said that employees aren't leaving as a result: "Fluctuation is normal and within the usual boundaries and was even lower in January compared to the previous year," he said.
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