European regulators said it would bring transparency and fairness to financial markets.
Consultants warned it would slash research commissions.
An analyst compared covering it to writing his own obituary.
The update to the European Union’s Markets in Financial Instruments Directive — the much-anticipated unbundling of research and trading costs — finally arrived in January after years of planning and preparation. Already, Greenwich Associates estimates that the regulatory change has shrunk the market for European equity research by an annual $300 million, a figure the financial services advisory firm says could climb still higher before the year is out.
Equity analyst Glenn Schorr, who covers banks, brokers, and asset managers for investment banking advisory firm Evercore ISI, says these declining research commissions mean some analysts either have to lose their jobs or get paid less money. His March 2017 research note, “Writing My Obituary Again?,” observed that analyst headcount had already fallen 10 percent — nine months before the regulation’s implementation. Asked how his research analyst peers were feeling now that MiFID II is in place, Schorr answered in one word: “Nervous.”
Schorr says the impacts of MiFID II will be felt disproportionately by European sell-side research analysts, who will be hit the hardest, but those at big banks like J.P. Morgan will be shielded by their multibillion-dollar execution businesses. Still, he thinks an industry shakeout is definitely coming. “It would be shocking to me if there wasn’t one,” he says.
Already, sell-side analysts have begun to jump ship, though so far only in small numbers. Of the 251 equity research analysts Institutional Investor ranked in last year’s All-Europe Research Team — the analysts chosen by money managers as the very best in the business — just seven were confirmed to have left the sell side for greener pastures. Some, like ex–Deutsche Bank analyst Anna Mulholland and former J.P. Morgan researcher Peter Elwin, have hopped over to the buy side. Others, like onetime Bernstein analyst Cosma Panzacchi and Deutsche Bank alum Ben Fidler, have moved to companies in the very industries they once covered.
In an email to Institutional Investor, Mulholland confirmed that MiFID II was a motivating factor behind her move to Pictet Asset Management last April.
“Pictet was a successful, growing, and private company,” she wrote. “Sell-side divisions of the big investment banks have been unduly buffeted from many sides, by mistakes made and regulatory repercussions in completely different areas of those banks.”
MiFID II, she added, was a key risk, likely to result in a “severely shrunken pie” for midtier research firms to fight over.
“The sell-side will not die out,” she explained. “But the model will become much more ‘pull’ than ‘push.’ ”
For Panzacchi, now an executive vice president at utilities company Snam, the primary driver of his decision to switch jobs was not MiFID II but a desire to move back to Italy.
“Brexit played a greater role than MiFID II,” he says.
Still, based on his interactions with analysts at multiple firms, Panzacchi expects the regulation will cause some to leave the industry.
“It is clear that there is a huge pressure on the sector,” he says. “People switch jobs when bonus season is over. I expect more analysts will be leaving in March.”
For those analysts who might be looking for a way out now that MiFID II is a reality, researchers based in Canada and the UK have put forward one promising option for a career change: becoming an investor relations officer.
A study published in December by authors Ole-Kristian Hope, Zhongwei Huang, and Rucsandra Moldovan found that former research analysts made the best IR professionals, with firms benefiting from putting an ex-analyst in charge of investor relations. These benefits included improved investor communications and an increase in events like analyst days. Institutional investors were more likely to invest with these companies, while working analysts were more likely to cover them.
“All of our findings suggested that analysts who become IROs [investor relations officers] have a leg up on all the other IROs,” says Moldovan, an assistant professor at Concordia University’s John Molson School of Business. “Maybe because they have a very deep and strong understanding of how to push their message across.”
Meanwhile, for those analysts who hope to hang on to their current jobs, industry experts like Schorr guarantee equity research isn’t going anywhere anytime soon.
“There’s been pressure on this industry for 40 years,” Schorr says. “MiFID II is a rationalization of resources, and probably one that’s overdue. But it’s hardly shutting down the industry.”