Future of Equity Research - 12+ Months into MIFID II

LDNFinance's picture
Rank: Baboon | 119

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:

  1. 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.
  2. 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
  3. Greater automation is being implemented into the execution part of the product rather than research - your job is safe (or should be)

Cons:

  1. The industry as a whole has shrunk. This was well predicted before implementation. Client's are engaging fewer research providers.
  2. 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.
  3. 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?

Comments (17)

Feb 7, 2019

Curious to know this as well

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Feb 7, 2019

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.

    • 5
    • 1
Feb 10, 2019
Street Smart:

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.

Like what exactly? What exit opps make sense for someone 2-3 years into BB ER? Aside from AM.

Feb 10, 2019

Curious as well. From what I've seen at my BB ER department it's 1) buyside, typically hedge fund for vast majority of people, 2) go get an MBA, or 3) corporate finance.

Most Helpful
Feb 7, 2019

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.

    • 7
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Feb 19, 2019

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.

    • 6
Feb 19, 2019

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:

  • A lot less regurgitation of press releases: I am always amazed some shops put up a note literally during the M&A conference call, that's definition of not thinking.
  • amount of analysts covering companies will go down, and the remaining ones will each have some differentiated to say
  • 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.
    • 4
Feb 19, 2019

Another (seems to be permanent) trend is that II votes are going from AUM-weighted to commission-weighted, which implies the entire sell-side industry is going to more short-term minded than it already has been in the past.

Feb 19, 2019

Speaking on my team not company-wide (MM bank):
- bonuses are down for senior guys but that seems to be equally due to MIFID II as it is to my sector being out of favor.
- bonuses for junior guys (my level) appear to be flat, but they seem to have been on the low-end already judging from the bonus discussion thread.
- they aren't firing analysts, they just haven't been replacing the ones that leave.
- focus is shifting to less day to day process work and more "value add" - although at the end of the day research isn't THAT differentiated from shop to shop.

Still think research is a good place to start, especially if you don't want the IB hours, but definitely looking to do 2-3 years and exit to corporate or the buy-side (preferably the buy-side).

    • 1
Feb 19, 2019

Are you trying to jump ship to buyside yourself? Why not go now instead of waiting in an uncertain climate?

Feb 19, 2019

I haven't been here long enough (still a 1st year associate)

Feb 19, 2019

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'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing.

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Feb 22, 2019

Like the guy from Stifel with the TTD downgrade on Wed..

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Mar 2, 2019

Joined my bank because they pitched me on growth, given its focus is on quality research and expectation to take market share from MIFID forcing BB to reduce coverage of smaller names. However, being a European bank, MIFID hit us hard which hit the US business indirectly. As a result, my previously growth oriented bank's hiring has hit a red light. And for a firm focused on taking market share, it makes it difficult without a salesforce who have the relationships to sell the research.

My understanding is MIFID has been brutal. I think thematic pieces do not generate the revenue needed and will be gone. Also, I think the perception that smaller quality research providers who originally thought they could survive in the MIFID world because of their "quality" research might not. Quality research is nice, but without the additional services and resources a BB provides, it doesn't make sense for a HF to keep a smaller research provider on their payroll.

Mar 8, 2019

Commoditized industry with few barriers to entry, high fixed cost / low variable cost, selling an increasingly obsolete product to hedge fund clients who are also nearing obsolescence... its hard. I am at the point where the bank is talking about giving me coverage but its hard to know if its worth it. Theres still analysts making $1mn+ at my shop (ranked in the teens typically). I wonder if I can reasonably expect half that number ten years from now though. Would be great to get people's views on the outlook for those of us who might be trying to build our own franchises in this environment.

Apr 16, 2019

FWIW, Research, like all products, evolves to satisfy the most profitable market which is HF - multiple pods flipping large portfolios = higher commissions. As a result I've seen the shift from quality and thematic research to notes that help the buy-side "position" ahead of earnings and other events. Corporate access matters more.

Unfortunately, the so-called "maintenance research" no reads will always be required because of Reg FD. Analysts can't speak on anything without writing a note, so notes are written first then sell-side can talk to buy-side.

Long-only is trying to avoid sell-side by bringing in-house more analysis, creating their own corp access teams, and relying on large scale third party shops to aggregate models and estimates.

Some analysts will survive, but most are leaving and not being replaced, a jr usually fills the spot.

It is quickly becoming a commodity, but so is some of the buy-side with passive investing, fee compression, and fewer listed companies.

It will be interesting how this all shakes out...

    • 1
Feb 19, 2019
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