When it comes to fighting for a piece of the commission from a client’s big trade, Wall Street analysts are often unarmed.
That’s the view from Brad Hintz, a former Lehman Brothers Holdings Inc. finance chief and 14-year financial analyst, who says a new chapter of the saga is starting. As big banks overhaul how they produce and distribute research-- using the Internet to limit access and track what gets read -- they may finally see how much clients are willing to pay for analysts’ work.
Hintz, now an adjunct professor of finance at New York University’s Stern School of Business, shared his take on the plight of analysts:
“This is simply another chapter in the unending quest for revenue clarity in institutional equity trading. When an institutional client executes a trade in equities and generates commission revenue, everyone on the floor claims his or her share. The equity block desk demands its portion, since it has provided liquidity to the client. The derivatives desk says ‘It’s mine’-- and points out the structured trade it recently made for the client. The sales force points out the numerous sporting events and lavish dinners that they provided the client. ‘We took ’em to the U.S. Open.’ And even the quants ask for a cut, arguing that ‘their’ algos or ‘their’ dark pool are the true reasons the client is even trading with the firm.
"Only the poor equity research staff has nothing to prove that the commission dollar belongs to them. Research management knows that the analysts meet with the institutional client regularly, they know that the client’s portfolio managers are on their research distribution list, but they cannot prove that their specific research is being read -- or if read, acted on. Indeed, research management relies on internal votes of client portfolio managers and the voluntary self reporting by clients to judge the success of their efforts.
"And this client reporting is not reliable. Research management knows that during IPO booms, client research votes shift to the largest underwriters and away from the rest of the Street. This boosts a client firms’ ranking among the bulge-bracket firms and thus allows an asset manager to capture a greater share of highly sought after underwritings.
"And to make matters worse, only a minority of hedge funds (which represent more than 30 percent of the total U.S. commission pool) report research analyst usage at all. So research management is always flying blind; measuring analyst effectiveness with e-mail counts, telephone time logs, numbers of research calls written, number of ‘actionable’ research calls written, number of travel days, number of clients on conference calls and of course the annual Institutional Investor rankings.
"It’s not surprising that research shrinks and grows with the predictability of a pendulum. ‘Clients don’t care; research costs us money’ goes the mantra of investment banking. ‘Research is a leech on the compensation pool’ is the familiar cry from traders at bonus time. But after each decimation of research, contrite management teams decide that fundamental research is part of the service that clients expect and the department is rebuilt -- only to be put to the sword once again.
"Maybe this time, technology will finally provide the answer to that age-old question: ‘Whose commission dollar is this?’"
That’s the view from Brad Hintz, a former Lehman Brothers Holdings Inc. finance chief and 14-year financial analyst, who says a new chapter of the saga is starting. As big banks overhaul how they produce and distribute research-- using the Internet to limit access and track what gets read -- they may finally see how much clients are willing to pay for analysts’ work.
Hintz, now an adjunct professor of finance at New York University’s Stern School of Business, shared his take on the plight of analysts:
“This is simply another chapter in the unending quest for revenue clarity in institutional equity trading. When an institutional client executes a trade in equities and generates commission revenue, everyone on the floor claims his or her share. The equity block desk demands its portion, since it has provided liquidity to the client. The derivatives desk says ‘It’s mine’-- and points out the structured trade it recently made for the client. The sales force points out the numerous sporting events and lavish dinners that they provided the client. ‘We took ’em to the U.S. Open.’ And even the quants ask for a cut, arguing that ‘their’ algos or ‘their’ dark pool are the true reasons the client is even trading with the firm.
"Only the poor equity research staff has nothing to prove that the commission dollar belongs to them. Research management knows that the analysts meet with the institutional client regularly, they know that the client’s portfolio managers are on their research distribution list, but they cannot prove that their specific research is being read -- or if read, acted on. Indeed, research management relies on internal votes of client portfolio managers and the voluntary self reporting by clients to judge the success of their efforts.
"And this client reporting is not reliable. Research management knows that during IPO booms, client research votes shift to the largest underwriters and away from the rest of the Street. This boosts a client firms’ ranking among the bulge-bracket firms and thus allows an asset manager to capture a greater share of highly sought after underwritings.
"And to make matters worse, only a minority of hedge funds (which represent more than 30 percent of the total U.S. commission pool) report research analyst usage at all. So research management is always flying blind; measuring analyst effectiveness with e-mail counts, telephone time logs, numbers of research calls written, number of ‘actionable’ research calls written, number of travel days, number of clients on conference calls and of course the annual Institutional Investor rankings.
"It’s not surprising that research shrinks and grows with the predictability of a pendulum. ‘Clients don’t care; research costs us money’ goes the mantra of investment banking. ‘Research is a leech on the compensation pool’ is the familiar cry from traders at bonus time. But after each decimation of research, contrite management teams decide that fundamental research is part of the service that clients expect and the department is rebuilt -- only to be put to the sword once again.
"Maybe this time, technology will finally provide the answer to that age-old question: ‘Whose commission dollar is this?’"
Wall Street Cracks Down on Free Sharing of Analysts' Notes
- Tracking reading habits with clicks could help prove value
- Banks' research costs seen falling 56% in decade through 2017
Wall
Street banks may have finally hit on a way to pinpoint the value of
analysts and squeeze more money from their research: Stop making it so
easy to share.
Bank of America Corp. has started embedding analysts’ reports into web pages, so it can more easily restrict access than with PDF files that are widely shared with people who aren’t paying clients, said Candace Browning, the firm’s head of research. It’s joining rivals Morgan Stanley and Citigroup Inc. in limiting access, and more plan to follow. The approach also makes it easier to track analysts’ readership and customize products for specific types of clients, according to bank executives and consultants.
“The sell side for years has had a model where it blasts out everything it produces,” said Michael Mayhew, founder of Integrity Research Associates LLC, which helps investors find the research they need. “This is an absolutely necessary next step because they have to understand what their customers are consuming.”
The main goal is to restore profitability to Wall Street research following a slew of new regulations in the past 15 years, including rules spurred by allegations that analysts touted stocks under pressure from investment bankers. But it also may provide key data in a debate that erupts every bonus season and job cull: How important, really, is analyst research to winning trades and other deals?
(For Hintz’s full portrayal of the fight over commissions, click here.)
The first big hit to modern stock research came in a 2000 rule requiring companies to disclose material information to all investors at once, making it harder for analysts to break market-moving news. Then a scandal led to the 2003 walling off of analysts from investment bankers, who sometimes pressed them to tout clients’ stocks. A third obstacle is unfolding, as regulators in Europe are considering ending the commission-based model, the industry standard which compensates banks for research with a share of an investment firm’s trading revenue.
Banks and brokerages will spend $3.4 billion on their research analysts around the world in 2017, down by more than half from $8.2 billion in 2008, according to Neil Scarth, a principal at Frost Consulting in London. That doesn’t include costs for technology, sales and other methods of distribution.
Money managers cut the amount they spend on commissions by about 26 percent after the 2008 financial crisis to $22.7 billion last year, according to Greenwich Associates, a Stamford, Connecticut-based consulting firm. Between 55 percent and 60 percent of those fees typically go to research each year.
Bloomberg News parent Bloomberg LP also offers research products through its Bloomberg Intelligence division.
While the web technology is hardly new, banks have been slow to take full advantage of it for analysts’ notes. Investors will still access research the same way -- through an e-mailed link or a company website -- but what they see will change. Instead of a PDF that could be viewed, downloaded or shared with others, they’ll be directed to a secure Web page.
Bank of America has been tracking clients’ habits for years through e-mails and a website where customers can see and download reports. But it doesn’t know what happens after they save them. Under the new system, clients must access a site to view material that stays there, much as they would peruse a favorite newspaper behind a paywall, according to Daire Browne, Bank of America’s chief operating officer for global research. The pages are more dynamic than a PDF and will have more security, making them harder to recirculate, he said.
“You’re not accessing a static PDF, you’re going into a website and you are authenticating,” Browne said. “That’s the whole premise here, that you have a greater ability to control the access coming in when it’s a living, breathing environment that we control.”
At Citigroup, clients receive an e-mail with just a few sentences about a report. Clicking a link takes them to a website where they can sign in to read the rest. This lets the firm track how many times a report has been viewed, how often clients access the system and which analysts are most popular. The system was put in place within the past year.
Banks also are fighting internal resistance. Analysts and sales staff have for years made it as easy as possible for clients to get reports, according to Mayhew. Until firms can persuade employees to change behavior, or prohibit PDF attachments, it will be difficult to prevent sharing, he said.
The next step, still to come for most banks, is to customize offerings to specific clients. Citigroup, Morgan Stanley and others are part of a group that has come up with a coding language intended to make it easier to search reports. Banks also may tailor the reports to, say, macro traders or stock buyers by adding or subtracting components they find most valuable such as charts or models, according to a bank executive.
“Over time, there is a prospect of premium prices,” Frost’s Scarth said.
“The fact is there is a lot of stuff produced by Wall Street that probably nobody would pay for,” Scarth said. “This should, in theory, force all research producers to specialize in areas where they really do have a competitive advantage.”
Bank of America Corp. has started embedding analysts’ reports into web pages, so it can more easily restrict access than with PDF files that are widely shared with people who aren’t paying clients, said Candace Browning, the firm’s head of research. It’s joining rivals Morgan Stanley and Citigroup Inc. in limiting access, and more plan to follow. The approach also makes it easier to track analysts’ readership and customize products for specific types of clients, according to bank executives and consultants.
“The sell side for years has had a model where it blasts out everything it produces,” said Michael Mayhew, founder of Integrity Research Associates LLC, which helps investors find the research they need. “This is an absolutely necessary next step because they have to understand what their customers are consuming.”
The main goal is to restore profitability to Wall Street research following a slew of new regulations in the past 15 years, including rules spurred by allegations that analysts touted stocks under pressure from investment bankers. But it also may provide key data in a debate that erupts every bonus season and job cull: How important, really, is analyst research to winning trades and other deals?
‘Another Chapter’
“This is simply another chapter in the unending quest for revenue clarity in institutional equity trading,” said Brad Hintz, a former chief financial officer of Lehman Brothers Holdings Inc. who last year ended a 14-year career as an analyst. Traders often win the credit for generating commissions on transactions that analysts feel they deserve, he said. “Maybe this time, technology will finally provide the answer to that age-old question: ‘Whose commission dollar is this?’”(For Hintz’s full portrayal of the fight over commissions, click here.)
The first big hit to modern stock research came in a 2000 rule requiring companies to disclose material information to all investors at once, making it harder for analysts to break market-moving news. Then a scandal led to the 2003 walling off of analysts from investment bankers, who sometimes pressed them to tout clients’ stocks. A third obstacle is unfolding, as regulators in Europe are considering ending the commission-based model, the industry standard which compensates banks for research with a share of an investment firm’s trading revenue.
Eliminating Analysts
The developments have prompted many firms to eliminate analysts. Also frustrating for executives is that a lot of research ends up in some form on Internet platforms such as Twitter minutes after release.Banks and brokerages will spend $3.4 billion on their research analysts around the world in 2017, down by more than half from $8.2 billion in 2008, according to Neil Scarth, a principal at Frost Consulting in London. That doesn’t include costs for technology, sales and other methods of distribution.
Money managers cut the amount they spend on commissions by about 26 percent after the 2008 financial crisis to $22.7 billion last year, according to Greenwich Associates, a Stamford, Connecticut-based consulting firm. Between 55 percent and 60 percent of those fees typically go to research each year.
Bloomberg News parent Bloomberg LP also offers research products through its Bloomberg Intelligence division.
Old Habits
Investors consume almost two-thirds of research via e-mail, according to a bank executive who studies readership patterns and asked not to be identified talking about proprietary data. Most others get it from platforms such as those run by Bloomberg or Thomson Reuters Corp. that provide access to reports from multiple brokers. Bank websites account for less than 10 percent of consumption.While the web technology is hardly new, banks have been slow to take full advantage of it for analysts’ notes. Investors will still access research the same way -- through an e-mailed link or a company website -- but what they see will change. Instead of a PDF that could be viewed, downloaded or shared with others, they’ll be directed to a secure Web page.
Bank of America has been tracking clients’ habits for years through e-mails and a website where customers can see and download reports. But it doesn’t know what happens after they save them. Under the new system, clients must access a site to view material that stays there, much as they would peruse a favorite newspaper behind a paywall, according to Daire Browne, Bank of America’s chief operating officer for global research. The pages are more dynamic than a PDF and will have more security, making them harder to recirculate, he said.
“You’re not accessing a static PDF, you’re going into a website and you are authenticating,” Browne said. “That’s the whole premise here, that you have a greater ability to control the access coming in when it’s a living, breathing environment that we control.”
At Citigroup, clients receive an e-mail with just a few sentences about a report. Clicking a link takes them to a website where they can sign in to read the rest. This lets the firm track how many times a report has been viewed, how often clients access the system and which analysts are most popular. The system was put in place within the past year.
Guessing Trades
At least one money manager who asked not to be identified said he isn’t thrilled about being monitored. He said he’s concerned that banks might figure out his trades based on what he’s reading. Bank of America doesn’t zero in on what individuals view and looks only at aggregate data, according to Browne. Spokeswomen for Citigroup and Morgan Stanley declined to comment.Banks also are fighting internal resistance. Analysts and sales staff have for years made it as easy as possible for clients to get reports, according to Mayhew. Until firms can persuade employees to change behavior, or prohibit PDF attachments, it will be difficult to prevent sharing, he said.
The next step, still to come for most banks, is to customize offerings to specific clients. Citigroup, Morgan Stanley and others are part of a group that has come up with a coding language intended to make it easier to search reports. Banks also may tailor the reports to, say, macro traders or stock buyers by adding or subtracting components they find most valuable such as charts or models, according to a bank executive.
“Over time, there is a prospect of premium prices,” Frost’s Scarth said.
‘Competitive Advantage’
Firms also are rethinking long-accepted practices of tracking client conversations with analysts, as well as attendance at bank-sponsored conferences and meetings with management. UBS Group AG, for example, is considering the amount of time spent with analysts in a model that assigns a higher value to a 30-minute phone call than one lasting 10 minutes, according to a person familiar with the Zurich-based bank’s policies.“The fact is there is a lot of stuff produced by Wall Street that probably nobody would pay for,” Scarth said. “This should, in theory, force all research producers to specialize in areas where they really do have a competitive advantage.”