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The end of sell-side?
Merril Lynch’s widely reported reduction in access to its sell-side research is something that I would interpret as a sign of trouble. I expect things to get worse for sell-side research, and I wonder what could replace it.
Merrill Lynch itself has made the comparison with the music industry. However the strategy of tightening access hardly seems to be working well there, why do investment banks think it will work in their industry?In any case, investment banks have never exactly distributed their research to all and sundry. They have certainly been free with recommendations, but bare recommendations are worthless — I would certainly never trade just because an analyst said so, with no examination of their reasoning and valuation methodology.
There are certainly going to be some people who have been free riding on Merrill Lynch’s research. The question how many of them are there who can be made to pay (or pay more) by restricting access.
Firstly, we can discount non-institutional investors who have been getting access through the web. They are never going to get access at prices they will pay under anything like the investment banks current business model for research.
Secondly, it might cause some redistribution of money going from (institutional) investors to brokers. In other words people might give Merrill a bit more research because they now need to to get the access they previously had anyway. Given that it is usual for brokers to offer multiple levels of access depending on the volume of business offered, I wonder how far this can be pushed. Tightening too far might risk losing clients who feel they are not getting enough access for the business they give.
Overall, sell-side research has become less profitable, because it has become more independent, and therefore does not boost profits from investment banking to the same extent. It is hard to escape the conclusion that less should be spent on it.
If brokers in general make access to research harder or more expensive will investors give the industry more money? Possibly, but it will also make buy-side analysts and independent (non-broker) research providers more competitive.
I do not believe that buy-side research can replace sell-side except, perhaps, at the very largest or very specialised fund managers. You need a lot of people to produce that level of detail.
However, I do think that the loss of some sell-side research is tolerable. It may seem harmful to investors if less research is done. However, do we really need 29 analysts covering HSBC and 35 covering Vodafone? Surely we would get a sufficient diversity of views 5 or 10 covered each company? Those numbers may miss a few, so there may be even more room for contraction.
You may say that these are very large companies that get a lot of attention, but this is where most of the effort goes anyway. The FTSE 100 takes up a lost of most analysts time.
Less, but much cheaper and more independent research seems like a good thing to me, it gives investors value for money, even if it might end up being bad for me personally.
Returning to the effect on the industry, the tightening up of access is likely to change little. The fact that Merrill Lynch feels it necessary to do it may mean that sell-side research is heading for harder times. Ultimately there is no real reason for research to be bundled with broking or carried out by brokers, and eventually the economics of this may kill sell-side.
However, there is no immediate replacement for it, and its death is likely to take a very long time. I give it a few decades before you expect investment banks to either withdraw from the business, or to completely unlink it from broking. In the meantime, I expect things to become gradually more difficult, but far from disastrous.
Comments(1)
Nice to see someone in the UK blogging on finance — all too rare
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