Broker Research and Other Bad Jokes

If you don’t want to know something, don’t ask the question.

The traditional Investment Banking equity research model is about to undergo a radical transformation. New regulations set to go into effect in 2018 in Europe require Investment Banks to break out the pricing of equity research charged to their buy side clients so that clients can be billed for research directly rather than paying indirectly through inflated commissions.

Until now, equity research has been provided ‘free of charge’ to generate commissions and win investment banking business from companies looking to finance. Now we are going to find out just what is actually being spent and what it’s supposed to be worth.

For you, I have news. It is worth just about nothing and always has been. But it’s expensive to provide. While the supply of equity research is seemingly endless, the demand may not be. The likely result of asking what it’s worth? You’re fired.

As Reuters pointed out this week, just the top 15 global investment banks produce over 40,000 research reports every single week.  Unfortunately, only about 1% of those reports are actually read by investors on any given day according to consultancy Quinlan & Associates. A recent survey of fund managers by Quinlan found that analyst headcounts at banks would have to fall by 30% in order to eliminate all of the research costs that investment fund managers wouldn’t be willing to pay for directly. The reason is poor quality work by junior people.

For example, more than 30 analysts cover HSBC on a regular basis. Only 11 of them have a rating of three stars or above. If you do not have a rating of at least three stars, you can probably be replaced by a chimpanzee.

As one fund manager quoted in the Financial Times notes: “The figures are all over the place at the moment. Some quotes are fair and reasonable, and with others we thought there is no way we are paying that. 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.”

May I suggest an answer based on long experience? Not much.