Banks’ equity-research operations are in decline

EQUITY research, the business of providing analysis of companies’ financial performance, may be a stodgy industry but it is not a simple one. Regulators fret about the sector’s Byzantine payment structure: investment banks dominate the market, but do not charge for it. They dole it out free to clients in the hope of future trading business. The understandable fear is that this set-up produces conflicts. Banks may be wary of issuing reports critical of companies; fund managers may end up choosing banks because of their research rather than the efficiency of their brokerage services. New regulations will overturn this model entirely.

MiFID 2, an ambitious set of European financial rules coming into effect next January, will force asset managers to disclose how much they spend on research. So banks will have to “unbundle” their services, billing clients for research and trading separately. Although the rules are being introduced by European regulators, banks across the world will have to change their pricing practices to comply.

These rules will be hugely, and beneficially, disruptive to a grossly inefficient industry. At present, banks blast…Continue reading

This post was originally published in the Economist.

Banks’ equity-research operations are in decline

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