LONDON (Reuters Breakingviews) - Securities analysts are about to be divided into winners and losers. A European directive will force sellside firms to charge fund managers an explicit price for European securities research from January 2018. The stratification will be pronounced. Many analysts will go; others will be even better paid.
The beneficiaries of the new regime are end-investors, who should pay less for research in their pension funds or individual portfolios, assuming transaction expenses don’t rise to compensate. As things are now, charges for analysis of equities and fixed income instruments get squished together with those for trade execution, which subsidise substandard research. The cost is borne by the retail clients that are an asset manager’s ultimate source of funds.
It’s easy enough to assume the losers are big banks with armies of analysts shielded by a lack of transparent pricing. There will be other casualties, though. Companies with small market capitalisations may find they have fewer, or even no analysts covering their fortunes, since big corporations account for a disproportionate amount of corporate finance and advisory fees. With diminished flows of information and opinion about their stock, the cost of capital might go up.
Some independent research boutiques could prosper by underscoring their conflict-free service. But there will be losers there, too. Big investment banks can cross-subsidise research from more profitable businesses like trading. Asian brokerage CLSA said on Feb. 28 that it was cutting its equity research offering in the Americas chiefly as a result of asset managers paying it less than previously for the same service. That dynamic is likely to be even more pronounced in Europe as the new Markets in Financial Instruments Directive II, as the reforms are known, takes root.
The biggest winners could be the top-ranked analysts themselves. For one, the market should get less crowded: Deutsche Bank, to take just one listed company, counts 34 analysts that cover its stock, where perhaps five would do. As with any occupation, price transparency should confer higher salaries on the genuinely talented. And if the superstars feel underappreciated, it shouldn’t be hard to find fund managers prepared to take them in-house.
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