Literally no one knows the true 'value' of equity research, not even the investment banks that are selling it. Up until now, equity research has been treated as a 'freebie' given away to institutional clients in return for trading commissions but that is all about to change thanks to the European Union’s MiFID II regulations, which require asset managers to separate trading commissions from investment-research payments.
Unfortunately, at least for the Investment Banks of the world, while the cost of generating equity research may be substantial, it turns out that the true 'value', as defined by institutional clients' maximum willingness to pay for reports, may be much less. Which is shocking given the creativity required to constantly generate new variations of daily reports politely suggesting that you "Buy The Fucking Dip."
Be that as it may, with deadlines right around the corner, 2018 offer prices for equity research in Europe are starting to roll in and we suspect there may be a little sticker shock among institutional clients who are used to having unlimited access to all research in return for placing a few trades each year. Just a few weeks ago we noted that Credit Agricole offered their 'Premium Research Package' for the bargain basement price of 400,000 Euros. Nomura, on the other hand, played the volume game by giving away their "BTFD" reports for just $134,000 a year.
Now, we can add Barclays to the list. Coming in at $455,000 per year for their 'Gold' package, it's hard to imagine how hedgies won't be knocking down their doors to gain access. Per Bloomberg:
The firm is proposing three levels of service -- bronze, silver and gold -- with the premium package comprising unlimited reports, field trips and “occasional” one-on-one meetings with analysts and corporate executives, according to a pricing document seen by Bloomberg News. At the bottom end of the scale, read-only access to European research will start at 30,000 pounds.
At Barclays, even if clients stump up 350,000 pounds for the gold “trans-Atlantic” package, they could still end up spending more. “Bespoke” analyst work and corporate access is priced separately, according to the document. Field trips, industry events and company management meetings are also at the bank’s discretion, and analyst one-on-ones are “capped,” it shows.
Prices in the document may not apply to all clients, have been in flux and could still be subject to change, a person familiar with the process said, asking not to be identified discussing the matter. A Barclays spokesman declined to comment.
Banks are scrambling as they enter the last six months before the decades-old practice of sending out free analyst reports as a courtesy and marketing strategy comes to an end. The European Union’s MiFID II regulations, enforced from Jan. 3, require money managers to separate the trading commissions they pay from investment-research fees. This means banks in turn have to be more transparent, providing specific charges for their analysts’ time and work in order to comply.
Of course, the logical takeaway from these exorbitant offering prices, if they hold, is that institutional clients will ultimately be forced to consolidate their vendors...translation, so long to the small independent research shops. Meanwhile, investment banks will be forced to control costs by trying to focus on writing reports that people actually read (vs. the 1% hit rate they have today). All of which means that those shrinking analysts pools are about to completely collapse.
In fact, as McKinsey recently noted, up to 30% of research analysts could be at risk of losing their cushy banking jobs as result of Europe's new regulations.
Europe’s impending ban on free research will cost hundreds of analysts their jobs with banks set to cut about $1.2 billion of investment on the area, according to a report by McKinsey & Co.
The consultancy estimates the $4 billion that the top-10 sell-side banks currently spend on research annually is likely to fall by 30 percent as clients become pickier about what they pay for, McKinsey Partner Roger Rudisuli said in an interview. Investment banks’ cash equity research headcount has fallen 12 percent to 3,900 since 2011 compared with as much as 40 percent in sales and trading, leaving the area facing “big cuts” to catch up, he 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 Wednesday, which Rudisuli helped 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.”
Of course, as we've said before, almost any amount of money seems, at least to us, to be too much to have the same people give you the same advice over and over again, namely "buy more stocks, faster."