Analysts’ EU jobs at risk, says McKinsey
Europe’s impending ban on free research will cost hundreds of analysts their jobs, with banks set to cut about $1.2bn of investment on the area, according to a report by McKinsey & Co.
The consultancy estimates the $4bn that the top-10 sellside banks currently spend on research annually is likely to fall by 30% as clients become pickier about what they pay for, McKinsey partner Roger Rudisuli said in an interview.
Investment banks’ cash equity research head count has fallen 12% to 3,900 since 2011 compared with as much as 40% in sales and trading, leaving the area facing “big cuts” to catch up, Rudisuli said.
“Two to three global banking players will preserve their status in the new era, winning the execution arms race and dominating trading in equities around the globe,” McKinsey said in a report on Wednesday which Rudisuli helped to write.
“Over the coming five years, banks will need to make hard choices and play to their strengths. Not only will the top ranks be thinned out, there will be shakeouts in regional markets,” the report stated.
TWO TO THREE GLOBAL BANKING PLAYERS WILL PRESERVE THEIR STATUS IN THE NEW ERA
The global research industry is being disrupted by the EU’s MiFID II regulations, enforced from January 3, which aim to tackle conflicts of interest by requiring asset managers to separate the trading commissions they pay from investmentresearch fees.
As the true costs of analysts’ time and work become transparent, investors will be more selective about what they pay for and inevitably consume less than when it was free.
“We have too many voices on large companies, anyway,” Rudisuli said. “Why does Apple Inc need 50 to 60 analysts covering them? I’m not sure the bottom half are adding value.
“Banks will experiment at first, but over time we could see things like auctions could take a more prominent role; at the end of the day there are only five seats in these meetings.
“The challenge there will be that the people willing to pay the most will be hedge funds, but the preference for corporates will be to meet with only long-only investors,” Rudisuli said.
Firms are also debating how to price analyst reports, with some firms modelling packages on cable-TV subscriptions, running from basic to “all-in” offers, according to the report. Deutsche Bank has pitched clients a metered, “pay as you go” approach whereas JPMorgan Chase has quoted customers a $50,000 flat fee for basis access to fixed-income analysis, people familiar with the matter have said.