Regulations have helped to squeeze the role of equity analysts and the "sell side" functions of some market participants, but new models are filling the space. This article examines the changed landscape.

A major development in recent years has been how regulators around the world have sought to split out the costs of providing analysis to banks and other institutions, sometimes a process known as “unbundling”, to shine a brighter light on costs and, so it is hoped, benefit the end-consumer. As is frequently the case, the law of unintended consequences operates: a stated policy objective (clearer data on costs) can lead to fewer activities that might be thought desirable (analyst research), or simply change how an industry operates (more independent financial research.) The European Union’s MiFID II directive, which comes into force in 2018, has a bearing on this matter, and the compliance rulebook is a complex one. Charles Tan, co-founder of Global Alternatives, an independent owner of cross-border marketplace platforms including Property Crowd, gives his views. This publication is pleased to share these insights and invites readers’ reactions.

A recent opinion piece from Bloomberg’s Andy Mukherjee drew some interesting (and painfully true) parallels between the fate of the equity analyst profession and the plot of Arthur Miller’s seminal play, Death of a Salesman.
 
Having been an equity analyst myself in a previous life, I found myself identifying and agreeing with many of Mukherjee’s observations about the gradual demise of the industry, brought about by a changing market and regulatory landscape.

 
According to a survey by research firm Greenwich Associates, of all the commissions that large institutional investors paid to their Asian equity brokers last year, 56 per cent was for research and advisory services - down from 63 per cent the year before. But what made 2016 especially awful for Asian equity analysts was the fact that total commissions were down 16 per cent year-on-year, meaning that research budgets across the board had probably shrunk by at least a quarter in absolute terms. 

This is by no means a uniquely Asian phenomenon, but rather an echo of a trend that has plagued equity desks in Europe since the approval of MiFID II in 2014 and in the run-up to its implementation in January 2018. Using the same metric as above, European equity analysts should be even more worried: research spend as a proportion of total commissions has declined steadily to just 50 per cent today, even as the commission pool has almost halved compared to its 2008 peak. 
 
All of this is, of course, no secret to industry insiders. When I left my previous employer in May last year, the writing was already on the wall. Turnover was high, morale was low, and equity research desks at other banks were facing the same pressure to right-size operations in order to reflect the new reality: commissions just weren't what they used to be, and this wasn't due to some cyclical slump but a fundamental shift in market dynamics.

Low trading volumes coupled with lower costs per trade (enabled by electronic trading) were making it difficult for institutional investors to pay for the research we analysts produced. In fact, according to Bloomberg, buy-side investors have nearly doubled their use of electronic trading since 2008 to 31 per cent of total trading volume.

Part of this shift can also be explained by the rising adoption of passive investing. The inability of most active managers to outperform broad market benchmarks consistently, and the resulting disillusionment with high fees in light of poor relative/absolute returns, have prompted investors to question the value of professionally managed funds. 

But while changes to regulations and investor attitudes have no doubt hastened the “death” of equity analysts, the real game-changer, in my opinion, has been technology. In much the same way that travel websites (e.g. Expedia, Trivago) and low-cost alternatives (e.g. budget airlines, Airbnb) have helped create a new breed of do-it-yourself travellers, the emergence of user-friendly online trading platforms and cost-effective index tracking ETFs, along with the proliferation of information thanks to the internet, have spawned a new class of do-it-yourself investors.

Looking ahead, I believe technology will continue to pose a secular headwind to the finance industry as we know it, with some exciting developments in the field of fintech already underway. Robo-advisors threaten to replace the role of independent financial advisors, peer-to-peer lenders are encroaching on the bread-and-butter business of banks, and crowdfunding platforms promise to revolutionise the way we invest by giving us greater, more granular access to a near limitless universe of alternative assets - previously the preserve of the well-heeled and well-connected.

As the economist Joseph Schumpter once observed, creative destruction - that process of industrial mutation which incessantly revolutionises the economic structure from within - is an “essential fact about the capitalist system” in which we operate. And at no point has this been more painfully obvious than the present, with the exponential pace of technological innovation and disruption across a number of disparate industries. 

But when one door closes, another door opens; and the diminution of the professional fund manager dovetails nicely with the empowerment of the individual investor, which I see as no bad thing. So farewell investment funds, hello crowdfunding investment. The future awaits.