Finance

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Wall Street banks used to be reliable and lucrative places for analysts to work.

Those days are coming to an end. Banks are slashing their research staffs, in large part because of new European rules that will require them to start charging clients for their research. Because asset managers are already under pressure to cut fees, they're unlikely to pay all that much to get research notes. Big banks know this.

At the same time, smaller, independent research firms have already been grabbing a bigger share of the business even before the introduction of these new regulations. That trend will most likely only accelerate in the coming years. In fact, these firms are poised to be the biggest beneficiaries of the European Union's MiFID II rules, which will go into effect in about six months.

According to Integrity Research Associates LLC, independent firms in the U.S. are now earning about 20 percent of all spending on research, up from 17.4 percent in 2011. In Europe, smaller research firms have doubled their share of the revenues over the past seven years, to about 11 percent last year.

Independent Streak
Independent firms are accounting for a growing proportion of research spending worldwide
Source: Integrity Research Associates LLC

Given this backdrop, it's not hugely surprising that three Barclays Plc analysts just decided to depart the British bank. According to a Bloomberg News article this week, Scott Davis, Carter Copeland and Rob Wertheimer left to create a boutique they called Melius Research LLC. The analysts decided to strike out on their own because they believe U.S. money managers will adopt the new European standards, according to the article.

Broadly speaking, these researchers, who focus on industrial companies, have just as good a chance, if not a better one, of being successful on their own. These independent firms have an advantage because they have already been charging investors for their analytics. They often provide niche data and have lower overhead costs. Rightly or wrongly, investors often think of them as being cheaper than bigger integrated firms.

Flat Revenues
Banks globally can expect research revenues to plateau in coming years
Source: Integrity Research Associates LLC
Totals for 2014, 2015, 2016, 2017, 2018, 2019 and 2020 are estimates

Big banks, on the other hand, have to decide how much to charge clients under the new European rules, which are aimed at eliminating conflicts of interest by requiring asset managers to separate trading commissions from investment research fees. Some of the charges quoted are improbable; how many asset managers would pay $10,000 for a phone call with a top analyst? How will investment firms justify paying more than a few banks $134,000 a year for access to their favorite researchers?

Research Returns
Analysts expect total research revenues to flatten as independent firms take a bigger share
Source: Integrity Research Associates LLC
Revenue figures for 2014, 2015, 2016, 2017, 2018, 2019 and 2020 are estimates

Meanwhile, McKinsey & Co. expects investors to cut $1.2 billion from their research budgets as the new regulations take hold. This doesn't bode well for analysts at banks, particularly those right below the top tier of firms.

The clutch of Barclays analysts who are departing won't be the last to do so. It's not an easy time to be in the research business, and more may find that there's more promise being independent.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net