Fewer client calls, more red tape and an ever greater pressure to pen attention-grabbing research: These are some of the ways the life of an analyst has changed in Europe since the implementation of new financial regulations.
The revised Markets in Financial Instruments Directive, which took effect a year ago, crystallized a long-standing existential crisis for research analysts. By forcing investors to unbundle trading fees and research costs, the rules put a price on analysts' ramblings, models, ratings, private briefings and the like. Work that used to be effectively subsidized by trading commissions and relationships with corporate clients now has to be judged — and priced — on its own merits.
It's no wonder then that the first year of MiFID II has seen a further drop in research headcount, contraction in coverage of smaller companies and industry consolidation in Europe. While research providers are still experimenting with pricing and users are reviewing their needs, the message is clear: You need to be at the top to survive.
"There'll always be in our view a need for outsourced, commonly shared experts on different topics," said Bruno Monteyne, an analyst covering retail stocks for Sanford C. Bernstein in London. "Do you need so many of them? No. Do you want to have a different shade of product to make sure that you can stand out? Yes. And it probably means that if you're not one of the top three ranked people on the sell side, it's probably very hard to make money."
And it's not just MiFID II. With the long-term decline of trading revenue and the rise of passive investing and automated trading, it's increasingly difficult for analysts to prove their worth, just as their budgets are being slashed.
Predictably, by putting a price tag on research, the European Union rules have made asset managers more selective about what they need, especially since most have opted to swallow research costs rather than pass them to clients. Many have also boosted their in-house analysis capabilities.