If you’re an equity researcher in London, it shouldn’t come as news that yours is a dying profession. Veteran equity researcher Simon Maughan warned of the coming research apocalypse back in August, when he pointed out that British regulator appeared to have it in for him and his brethren.
“If you’re looking for a class of bank staff that’s in danger of extinction, then equity research would be near the top of that list,” Maughan told us ominously. “There’s massive pressure on asset managers to cap their research budgets. In the long term, managers will pay a lot less for research and far fewer equity researchers will be needed.”
Maughan's claims were more than the ramblings of a paranoid research professional. Today, Martin Wheatley, head of the UK’s Financial Conduct Authority, will be making a speech that should make equity analysts’ blood run cold and discourage them from taking out large mortgages in anticipation of high future pay.
Wheatley will reportedly pledge a shakeup in the way fund managers pass third-party research costs on to clients. The FCA estimates that fund managers spend £3bn annually on equity research produced by banks. Right now, this £3bn is ‘bundled’ in with fund managers’ commission charges. In future, Wheatley wants fund managers to pay the £3bn themselves. If fund managers pay themselves for research, they'll be “more focused and diligent” about the research they purchase, Wheatly told the FT.
This is bad news for equity researchers, however. Research by Frost Consulting and software company Quark cited in Financial News suggests that investment banks in fact spent $5bn producing equity research last year. If these costs were borne entirely by the fund management industry, Frost and Quark estimate that operating margins for active equity fund managers would fall from 23.5% to 12.5%.
If that happens, fund managers will clearly buy less research, pay less for research, and try to do more research more cheaply in-house. Equity researchers in banks would clearly lose their jobs, earn less money, and need to find new poorly paid positions on the buyside.
It’s all a bit of a shame as equity research jobs have been going through a bit of a renaissance this year, with recruiters in London claiming that things have been looking up. Thanks to Wheatley, it won't last.