Banks to Cut $1.2 Billion in Research Spending, McKinsey Says

  • Hundreds of analyst jobs may go after MiFID II, study says
  • Report sees duo of banks dominating trading as others retrench

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.”

The global research industry is being disrupted by the European Union’s MiFID II regulations, enforced from Jan. 3, which aim to tackle conflicts of interest by requiring asset managers to separate the trading commissions they pay from investment-research fees. As the true costs of analysts’ time and work become transparent, investors will be more selective about what they pay for and inevitably consume less than when it was free.

Read more: How banks are preparing for the new rules

“We have too many voices on large companies anyway,” Rudisuli said. “Why does Apple Inc. need 50 to 60 analysts covering them? I’m not sure the bottom half are adding value.”

Another change Rudisuli foresees for the industry is the start of bidding wars for the most valuable commodity banks can offer investors: time with corporate leaders and their star analysts.

“Banks will experiment at first, but over time we could see things like auctions could take a more prominent role; at the end of the day there are only five seats in these meetings,” he said. “The challenge there will be that the people willing to pay the most will be hedge funds, but the preference for corporates will be to meet with only long-only investors.”

Firms are also debating how to price analyst reports, with some firms modeling packages on cable TV subscriptions, running from basic to “all-in” offers, according to the report. Deutsche Bank AG has pitched clients a metered, “pay as you go” approach whereas JPMorgan Chase & Co. has quoted customers a $50,000 flat fee for basis access to fixed-income analysis, people familiar with the matter have said.

‘Finishing Line’

“Banks are scrambling to get these pricing infrastructures in place, as well as how they do tracking and invoicing,” Rudisuli said. “They are all rushing to the finish line to be ready in January.”

MiFID II comes amid a shift of investor cash into cheaper passive funds, tracking stock or credit indexes, from active asset managers or hedge funds in recent years. With margins under pressure, active managers are demanding more idiosyncratic insight rather than mass-produced reports, according to the report.

“MiFID II is a catalyst for all of this change, but the ultimate driver that we see on the buy-side is pressure from passive funds,” Rudisuli said. “Over the next five years I expect more changes than the last 25.”

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