Will Controlling Bank / Brokerage Research Damage Client Relationships?Mark Melin
Anyone who reads bank research on a daily basis likely develops favorites – research analysts that provide tradable insight, interesting angles on issues and mathematical perspective that can shape a trading or investment thesis. Then there is research that falls short in consistency or fails to achieve a track record of accuracy that speaks to value. And then there is a preponderance of research where the writers are best not at providing tradable insight or core performance driver analysis, but are best at obfuscating and adding to the complexity. These differences could come in sharp focus as banks begin to demand more from their research analysts – and might be moving in a direction to better track results.
Market research pieces are too numerous to read everything on a daily basis, but a prediction accuracy scoreboard might provide a useful filter
“Sometimes I think my job is reading research,” a portfolio manager at a multi-billion dollar relative value hedge fund told ValueWalk recently. Bank and brokerage research – good research – is often discussed and bandied about by hedge fund managers, and the analysts who break through the endless clutter are respected. It is less clear how this translates into revenue for the banks, which could be one reason that spending on bank research, with recently topped out near $8.2 billion annually, has fallen to just above $4 billion in 2015 and is trending lower. Even with the lowered spending, Greenwich Associates is reported to estimate that more than half of all commission revenue goes to compensate the organization’s research department. Even with the lowered spending, the amazingly large volume of market research makes it difficult for some to find value in a vast sea of what can exceed 500 separate pieces of research every day.
As banks and brokerages are increasingly under pressure to generate earnings growth, with many bank stocks stagnate in price over the past decade, an old adage comes to mind: Employees who can tie a positive P&L statement to their names are safe from job loss. The problem for bank research analysts is they might not be able to put a dollar figure on their share of the revenue and good will generated through their work, as much if not all of it is freely distributed.
This could soon change.