Traditional bank and stock broker equity research income could plummet by as much as a third worldwide over three years following the introduction of new European financial regulations next year, global consulting shop McKinsey says in a recent report.
“The result could be a sharp decline in the demand for equity research—the consensus view of banks surveyed by McKinsey calls for an industry-wide drop in equity research revenues of 30 percent or more over the next three years,” the study says. “Independent research providers should see a gain in revenues from current levels, suggesting that the revenue pool for banks and brokers will likely shrink even further.”
McKinsey says the European MiFID II regulations, due to take effect in January 2018, would also hit funds management profits globally.
“For asset managers, as research becomes an itemized cost, profits could be sharply reduced—by as much as 15 to 20 percent for firms in Europe,” the paper says.
Among a long list of other items, the MiFID II rules force institutions to provide equity research as a stand-alone service, ending the long-established institutional practice of bundling research with execution.
“For the first time, bank and broker dealer equity research will operate as a free-standing profit center, forcing a transformation of the business,” McKinsey says. “The buy side will pay broker-dealers for actionable research that adds investment value, but the demand will fall far short of the mountains of research that banks currently supply ‘for free’.”
While the new regulations officially apply within European boundaries only “the impact is likely to be broader, as asset managers extend the MiFID II model of separate payments beyond Europe to their global operations”, the ‘Reinventing Equity Research as a Profit-Making Business’ report says.
According to McKinsey, traditional equity research providers – a sector dominated by banks and large broking houses – will have to adapt quickly to the post MiFID II world by playing to their specific strengths, understanding client research needs, developing robust pricing methodologies, and adopting new technologies “to generate novel investment ideas and lower costs”.
The McKinsey report suggests five equity research and execution business models will fight it out in the wake of MiFID II:
- A handful of global banks offering broad services across both equity research and execution;
- “Another cadre” of two or three non-banks that will provide global execution services with no, or very limited, research;
- A mid-tier of “universal banks” will struggle to maintain their current model in the face “of dwindling research revenues and the competition for low-cost execution”, (albeit with some relief via in-house banking and wealth management units) – ultimately, they will have to focus on one or the other;
- Most banks will cut back to focus on local and regional markets with, perhaps, “one to three” such institutions able to operate per region; and,
- Independent research firms offering little or no execution.
The latter could see “significant growth in the new landscape, as they reverse the past trend among many research boutiques of offering execution as a means for the buy side to pay for research”, the McKinsey report says.
Daniel Kieser, Shareclarity managing director, said the independent NZ-based equity research platform was poised to benefit from the global trend identified by McKinsey.
Kieser said Shareclarity, launched late in 2015 as a ‘crowd-sourced’ online equity research business, had just released the first of a new wholesale product range that “aligns” with the McKinsey findings.
“Wealth advisors can now create [via Shareclarity] their own customised and branded reports that they can download on-demand instead of waiting overnight for the other broker reports to be published,” he said. “We now cover 246 companies, which is more than the other research houses in Australasia.”
Kieser, INFINZ emerging leader of the year in 2016, said Shareclarity, which also launched in Australia last year, was gaining good traction in the retail market, adding up to 50 new members each week.
Recently, the firm appointed Phil Norman, founding chair of Xero, as an independent adviser to help “scale and commercialise Shareclarity”, he said.