The equity-research industry was already in trouble. Trading profits at banks have declined since the financial crisis, so they have had to cut costs. Estimates from Frost Consulting show that research budgets at major investment banks have fallen from a peak of $8.2bn in 2008 to $4bn in 2016 (see chart). Headcount seems to be falling, too. Coalition, a research firm, estimates that research jobs at banks have fallen by about 10% since 2012, roughly in line with the decline of front-office jobs as a whole. Moreover, the trend in the industry is towards increased use of “passive” investment funds that simply track a market index. So the demand for research services is in secular decline.
Equity research will not disappear entirely, in part because the industry performs other functions. Surveys have shown that investors are less interested in researchers’ exact forecasts or analysis than in their general industry knowledge. Moreover, much of equity research is actually about “corporate access”, ie, connecting investors with company managers. Fielding phone calls and acting as chaperones may not be as glamorous as publishing market-moving reports. But they are at least labour-intensive activities. Top analysts will still be valued, as will those specialising in niche fields. Independent research firms will benefit. But fund managers will have to do more of their own analysis. And persuading investors to pay for mediocre research will be harder.