If you're an equity researcher at an investment bank in London now, you could be forgiven for feeling a little...queasy. Something horrible has been lurking around the corner all year and as we enter the fourth quarter, its shape is being thrown into sharper relief. With its request that banks charge separately for equity research, MiFID II always looked ugly. But with more and more assets managers saying they'll try absorbing these extra costs themselves (rather than passing them on to clients), it's looking uglier still.
Investment banks' revenues relating to equity research were already predicted to fall by 30% after MiFID II comes into effect next year. As fund managers react to the erosion of their own profit margins from the extra costs, there's a possibility revenues could reduce by even more. In the worst case scenario, McKinsey & Co. says revenues could be down 50%. Equity research businesses are far from ready to face this bleak reality: as McKinsey & Co. pointed out in June, while equity sales and trading headcount has been cut 40% since 2011, equity research headcount has been cut just 11%.
Something needs to change.
For the moment, headhunters specializing in equity research jobs in London say the only real change is to hiring: there isn't any. In the run up to MiFID II, banks are sitting firmly on their hands.
This is surprising. MiFID II is widely expected to benefit top-rated equity research analysts whose star quality should be a big draw once banks can charge for their output. "I'd expected a lot more hiring at the top end," says one headhunter. "It hasn't happened." More surprisingly, though, banks haven't thrown their mediocre researchers out the window. Instead, there's just an eerie silence before the MiFID roller coaster makes its move.
Headhunters predict this will all change once the process of charging for equity research gets underway in 2018. "Banks are going to give their researchers three to six months under the new regime," predicts one. "Researchers will have one or two quarters to prove their ability to pull-in revenues, and if they can't they'll be out." Once the dust has settled on the new model, he predicts a widespread equity research cull in June 2018.
Zaki Ahmed, director of equity-focused Financial Search Limited, says equity researchers are about to be exposed to the laws of nature: "It will be "survival of the fittest" in equity research. Some analysts have already consciously decided they will probably not make the grade in their sector so have switched to investor relations, the buy-side, or financial PR."
The good news is that once the weak equity research specimens have been eliminated and budgets freed-up, research headhunters also predict a belated rush of recruitment. Everyone will want to hire the top equity researchers who can generate big revenues. Everyone will also want to hire those top researchers' teams. "You will see the emergence of the 'superstar analysts'," predicts Ahmed. "These will be the top three or four people in their relevant sectors who have a strong franchise and are the "go to people" in their space....there will be a return of "team moves" where these top analysts will transfer their whole teams to other banks and even boutiques."
The upshot is that if you work in equity research and you prove yourself as a big research fee earner or as the adjunct to a big fee earner in the first six months of 2018, you could be one of the most sought-after people in the market in 12 months' time.
Not only that, but you could get paid a lot more than you do now. "There's definitely going to be some pay inflation for these "franchise analysts"," says another equity research headhunter. "Everyone's going to want to the same people."
How much will "franchise analysts" get paid? One headhunter suggests seven figures is conceivable, and predicts they'll be lured with two year guarantees. Ahmed suggests some franchise analysts will move to independent research boutiques where they'll be paid a percentage of their revenues.
Either way, for some equity researchers a great future probably beckons. It's just surviving the next nine months that's going to be difficult.
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