(Bloomberg) -- Upending eight decades of convention in how equities research is priced on Wall Street will increase transparency and reduce conflicts. What it won’t do is make more people want to become analysts.
Both views are courtesy of Craig Moffett, who sees his own boutique firm MoffettNathanson LLC thriving as rules are enacted in Europe next year to prevent fund managers from using client assets to pay for research. There’s a downside to reform, according to the 54-year-old former Sanford C. Bernstein vice president, and it may be the slow decline of star stock handicappers as the current generation ages.
“There’s a small number of dominant analysts that can make a living doing things the way Michael and I make a living,” he said, speaking in a Bloomberg interview with partner Michael Nathanson. “It’s not clear where the next generation of analysts will come from.”
Moffett is much less worried about the present. His firm commands annual subscriptions of $100,000 for its insights on telecommunications and media, more for a service that adds phone calls with analysts and executives, according to three clients who requested anonymity. New rules may cement firms such as his that exist without the aid of trading commissions.
Those regulations, known as MiFID II, for Markets in Financial Instruments Directive, aim to curtail a practice in which fund companies directed stock orders to firms as a way of paying for investment research, an arrangement that critics said led to too many analysts offering too much bad advice. With money for research coming out of profits rather than client assets, managers will insist on more for their dollar -- or so it’s hoped.
Research Budgets
Among analysts, that’s “good for the best of the best, and bad for the rest,” Moffett said. But another consequence may be that as research revenue shrinks over time and opportunities for young analysts to shine become fewer, the industry won’t attract talent like it used to.
Less spending on research and consolidation among brokers and fund companies are likely side effects of MiFID II, according to an October white paper published by Bloomberg Intelligence, with Edison Investment Research and Frost Consulting. Asset managers in Europe and the U.S. may cut more than $300 million from research budgets in anticipation of regulations, suggested a Greenwich Associates survey of fund managers. Evercore ISI analyst Glenn Schorr -- in a report entitled ‘Writing My Obituary Again?’ -- predicted that smaller or “middle of the road” brokers and asset managers will feel the most pain.
Analysts with a brand name -- such as homebuilder expert Ivy Zelman -- will be able to survive, while other analysts may go in-house at funds or family offices, Quinlan & Associates’s Benjamin Quinlan said in an interview. The firm’s March report predicted a 25 to 30 percent reduction in global research spending by 2020 and described “growing signs of panic” as brokers and fund managers begin to digest MiFID II implementation challenges.
Pricing Models
With the rules taking effect in January 2018, research providers are racing to find pricing models. Some banks are proposing as much as $10 million a year for complete access to research, or up to $10,000 for a phone call with a top analyst, according to the Financial Times. Macquarie Group Ltd.’s solution is a new a la carte system, providing access to research and phone calls on a pay-as-you-go basis.
In MoffettNathanson’s model, subscribers pay an annual fee for either the basic or more in-depth service. There is no a la carte pricing for phone calls with analysts or access to executives at the firms they cover, Moffett said, declining to comment on the cost of their subscriptions. The firm, which recently expanded into software research, compensates analysts according to how many subscriptions they generate. Moffett and co-founder Michael Nathanson come as a package, while software research and any future industries the firm covers will operate as separate subscriptions.
Fewer Analysts
As the buy side crunches budgets and the sell side explores new ways to hawk insights, one thing seems clear: there will be fewer analysts in future. Moffett predicted that a large-cap stock like Verizon Communications Inc. could in the future be covered by just 10 or 12 firms -- a far cry from the 39 Verizon analysts Bloomberg counts today. Another casualty could be smaller and medium-sized companies, which won’t get as much attention from the analysts left on the Street.
There may be opportunities, too. Independent research suppliers and exchanges providing stock coverage may benefit, according to the Bloomberg Intelligence white paper, and there may be an increase in issuer-sponsored research. Large asset managers may also fund research internally, according to Schorr. And, while star analysts who can command their own fan base tend to be “old fossils’’ -- much like the domination of revenues in the music industry by bands from the 1970s -- “there will still be Beyoncé’s,’’ Moffett said.
RECOMMENDED FOR YOU
POPULAR