A good friend of mine whom I studied economics with at university is having a midlife crisis. Thankfully the crisis has nothing to do with his family life. He has a lovely wife and two great kids.
His crisis is centred firmly around work. He is a research analyst at a European investment bank and, like many of his colleagues, he is worried about losing his job.
He has good reason. Tighter regulations and falling profits have forced financial institutions to part ways with their many economists, bond strategists and stock pickers. Figures from Coalition, a data provider, show the ranks of investment bank research analysts have fallen by a 10th since 2012, to 5,981.
Deeper cuts are expected. My friend puts it to me as such: “If I haven’t been snapped up by an asset manager sometime soon, then don’t be surprised if the next time you hail a black cab I’m driving it.”
I really hope he does not lose his job — he is good at it and so are many others — but the practice of investment banks and brokers producing reams of research, the bulk of which is consigned to the bin without ever being read, must surely come to an end.
In Europe that is looking likely. The introduction of new rules, known as Mifid II, will bring to a close the fund industry’s decades-long practice of lumping together the fees they pay investment banks for research and trading. This murky system has meant equity and fixed-income trading costs, which tend to be passed on to asset managers’ clients, have been inflated to include the cost of providing “free” research reports, reports investors had no idea they were picking up the bill for.
The UK regulator has estimated that £1.5bn of investors’ money — over and above charges savers agreed to pay to investment managers — was spent on investment research in 2012.
Now, for the first time, asset managers in Europe will have to make it clear to investors exactly how much they are being charged for research. These changes are forcing investment groups to question just how much the research they take from analysts or brokers is really worth.
Very little is the early answer. According to a poll of 30 global asset management companies, investment groups intend to cut their analyst research budgets by 30 per cent. Another poll has found that two-fifths of asset managers will expand their own internal research teams, rather than relying on banks.
Brijesh Malkan, a former Legal & General fund manager and a director at BCA Research, told FTfm towards the end of last year: “Asset managers were receiving 200 pieces of content on Facebook on a weekly basis. That has already halved over the past three months. If you are the 20th-rated analyst within Goldman Sachs’s telecommunications team, you probably need to be looking for a job pretty quickly.”
Happily Mifid II has already encouraged good practice among some asset managers. Neil Woodford, Britain’s most celebrated fund manager, became one of the first investors to stop charging clients for research last year. Mr Woodford said his company would use its own money to pay for research used to run the group’s £9.5bn flagship fund.
Craig Newman, chief executive at Woodford Investment Management, said at the time: “Research costs are a function of our role and we believe it is only right that Woodford Investment Management, not our investors, pays for it.”
Baillie Gifford, the Scottish asset manager, and M&G Investments, the £255bn fund manager owned by Prudential, the UK insurer, have followed suit.
M&G said in a statement: “While the transaction costs of M&G’s retail equity funds, which cover dealing and external research, are already among the lowest in the industry, we will stop charging all investors for external research altogether from January 2017.”
This can only be a good thing. My friend may well be a loser from this but even he can see that investors will be deserved winners. “The game is up,” is how he puts it.
Chris Newlands is asset management editor at the FT and editor of FTfm