Just came out a client meeting on the dynamics of the Equity Research industry following the implementation of the industry killer aka MiFID II. Here are a few insights:
Pros:
- Due to the changes in fee structure and the quarterly evaluation of research providers by the buyside, banks are genuinely reshaping focus from churning out cookie cutter research to maximizing the quality of insights.
- Independent brokers and middle-market firms who were already competing via quality had a head start and are taking a larger market share than pre-regulation
- Greater automation is being implemented into the execution part of the product rather than research - your job is safe (or should be)
Cons:
- The industry as a whole has shrunk. This was well predicted before implementation. Client's are engaging fewer research providers.
- Research depts are typically becoming Loss Leaders for larger firms. However, this is part of the Investment Banking package and, at least from today's viewpoint, provision of research is expected to continue.
- Revenues (and therefore bonuses) are increasingly unpredictable due to the research provider evaluation process. This means, in 2019 you may be expecting a top-bucket bonus, however, if your client evaluates your firm's research as the bottom bucket and underpay, you may be pretty unhappy during bonus season.
I have a couple of questions which you guys may be able to help with:
- Have you noticed a headcount increase/decrease in research departments
- Do you perceive the regulation to have positively impacted the ER career (higher quality products) or negatively impacted (less lucrative)
- If you could start your career again, given the solid credentials required to break into ER, would you choose ER now that we know how MiFID II has shaped the industry?
For what it's worth, what I have seen/heard is: - MM firms getting squeezed and bearing the brunt of buy-side's changes. Boutique/Niche research firms and BB's seem to be doing best. Everyone will pay for BB's and Boutique/Niche guys are cheaper on a sector-specific basis (and sometimes have better research). - Seems like MIFID was adopted rapidly by some US-based large institutional clients. Caught some people flat-footed and possibly a large part of why (generally speaking across Street) Equities revs have declined a fair amount y/y. - Headcount reduction has been voluntary (mostly) as people aren't getting paid what they used to make, get frustrated and leave. Haven't really seen layoffs but rather a lack of hiring.
Research isn't what it used to be and will likely never be so again. Best bet is get in for a few years at a BB, get trained up while getting paid better than your junior peers elsewhere and go do something else.
Granted this is all from my sector's perspective, could be different or more nuanced depending on your coverage.
Go do whatever you want. Yeah there are generally structured paths to certain areas such as banking to PE, but I have friends who have gone PE from ER. Go HF, go L/O, go Corp Dev. or IR. Go get an MBA and completely reset. Have even seen guys move to banking from ER to open up more exit opps. You're really only limited by lack of action. If something seems interesting, go network and figure out a way to make the move, not saying it won't be difficult but give it a shot.
Remain convinced that ER is a very good start your career and has wide variety of exit options if you sell the experience intelligently. You are a business analyst ultimately - your job is to assess the financial outlook for a business, as well as more soft factors like competitive advantage and company strategy. Have seen many people with 2-3 years of ER experience move into all types of industries - VC, growth equity, corporate strategy, IBD, consulting. Plus, of course, the traditional exit option which is AM/HF. Think it's a great training ground which is often overlooked. In early years of IBD at least a certain amount of focus is on issues such as formatting and "process management" - now ER is not all useful work either (do not forget it is a sales job so you will have to spend plenty of your time having the same conversation over and over again with clients) but depending on what team you go into you can get some very useful experience early on in your career that can allow you to think very intelligently about how to analyse a business, plus of course if you are specialized in a particular sector some great sector knowledge should you want to move into a corporate strategy role in that sector.
Answering your questions - headcount at my shop has decreased more due to idiosyncratic reasons, haven't seen churn going up just because of mifid II. Churn will still spike for all shops after bonus season. I guess it gets tougher to lateral too just because there will be fewer senior analyst openings going forward? - Depends on your vantage point really. Refraining from making a reference to the book Antifragile, I think for the equity research to be around (antifragile), some of the shops have to go out of the business (fragile). It obviously sucks to be inside the industry right now, knowing the million-dollar pay for senior analyst days are long gone and teams have to do more with less because a lot of firms are cutting costs. However, from vantage point of a consumer of research reports, I think it's definitely positive:
more focus on thematic / industry primer pieces to educate and save time for clients, earnings notes should only be put out when analyst believes there is an inflection point or wants to make call
I would do ER if I cannot get into buy-side directly, good platform to learn about the industry, a lot of sell-side work is busy work but I think of it as what I have to pay to learn about the industry, form an investment style, and then move over.
I'll add a negative....I've noticed a lot more analysts trying to make unnecessarily controversial calls just to seem like they're adding value
I've been in ER for 20 yrs and it has changed so much (not in a good way) that I would not recommend it as a long-term career to anyone early in their career. I think as a first job out of undergrad it's fine if you do it for 2-4 years but beyond that I wouldn't do it. I would either get an MBA move to a different type of job other than ER or IB. The compliance regs have continued to increase making it harder to get an edge. For example, on an NDR I now cannot call or email clients unless I have published a note. It used to be you could call/email clients while on the road in real-time. There was never any inside info but the timeliness of mgmt tone, investors concerns had value. MiFID II has made things much worse and it's still early days and will, I think, worsen further. You also now have some large buy-side shops creating there own corporate events departments to schedule NDRs and company HQ visits/plant tours, etc. and effectively cutting out the sell-side. Corporate events is one of the areas an analyst with good corporate relationships could add value and get recognized and paid. So now that is slowly going away. Buy-side budgets have been cut and they have culled the number of brokers they are paying. This is not going to reverse. There was a time when ER was a really fun job that paid exceptionally well. Those days are long gone. I've got one, maybe two more years until I am out for good and onto something else.
I would probably lean toward ER. I think 1st & 2nd years in ER get more modeling and actual analysis experience than in IB. That said, some of the larger firms have very good IB training programs where you learn a lot so it can depend on where your job opportunity is. I do think sell-side ER does get a negative taint by some in the hedge fund space. It's a tough call to say which would ultimately benefit you more in getting into the hedge fund world. Just be aware that HF is all about your performance today, this week, this month. The window to underperform is very short. Make sure you understand that.
Maybe you should look into trading and go to a more trading oriented shop. Less fundamental analysis more about product.
Essentially there are two general profiles of Hedge Funds or People at Hedge Funds.
Fundamental - Deep research, analysis, trying to get an edge with all kinds of fundamental data, probably longer hold periods etc. I would argue this does not include the equity L/S guys that run delta and factor neutral and just punt earnings and relative performance all day long even though they will have analysts doing fundamental work for them. The skill set here is in analysis, process and then PM sizing and/or catching the catalyst. This is more like the Equity and Credit funds out there in general. Backgrounds are often IB, research analysts etc.
Trading - More old school. Knowledge of derivatives, more technical (either analysis, or product or both), much faster moving, more highly levered. Not as fundamentally focused. GE is going up and the technicals are telling you to buy, you buy a bunch, keep a stop loss, do some work (or yell at the analyst to do more work), make some phone calls, glance at SS analyst research and maybe buy more. Monitor it like a hawk. This is more like Macro, Relative Value strategies, CTAs/Quant (ok that's more quant/machine based) etc. These funds may or will have fundamental analysts as well but they are not often risk takers and often that is not a path to become one. The key skill is product knowledge, understanding of flow, ability to act/react quickly, understanding of financing, leverage, sizing and sheer discipline. In these kinds of shops you will see more traders/market makers and some sales folks as well as the odd strategist (a rarity but it happens) as risk takers.
There is certainly some overlap, but the types reflect often fundamentally different skill sets, personalities and approaches. No one is better than the other, but they are different.
Good Luck