Better times lie ahead for analysts

Prospects could be looking up for equity analysts after two difficult years. Headhunters say bonuses for 2003 could rise and banks are planning to hire more analysts in 2004.

The head of research at a European bank said bonuses for equity analysts were likely to be up by 10% thanks to improving market conditions. "There has been a resurgence in equity markets and M&A is recovering. Analysts will see that reflected in their pay."

Jonathan Evans, managing director at Sammons Associates, a UK recruitment firm, said equity research bonuses in 2003 could be as much as 15% higher than in 2002.

This means a junior equity analyst might expect to receive a salary of between 60,000 (€86,000) and 80,000 plus a bonus of between 40% and 80%. A senior analyst could receive between 100,000 and 120,000 and a bonus of between 150% and 600%. For a team head the package could be base pay of between 120,000 and 150,000 and a bonus of between 250% and 800%.

Demand for analysts may also rise as primary and secondary equity markets pick up.

Telecoms analysts in particular will be in strong demand, according to headhunters. Banks are also said to be looking at hiring analysts for sectors such as media, building, property and healthcare, where staff levels were cut in the past two years.

James Heath, managing director at Greenwich Associates, the UK recruitment firm, said demand is strong for young equity analysts with between three and four years of experience. He said redundancies among junior staff were heavy in the past few years, and banks hired insufficient number of graduates to fill junior roles as markets rise.

Heath is advertising on behalf of banks for junior analysts to cover the media, banking, telecoms and utilities sectors. He says pay for an analyst with two to three years' experience is between 40,000 and 60,000 with a bonus of between 40% and 60%.

Equity analysts' improving prospects come after a year of mixed signals. JP Morgan hired analysts for its London pharmaceutical, media, telecoms and transport research teams in October. ABN Amro hired five equity analysts in September. In April, Credit Suisse First Boston recruited Nick Bertolotti, head of European media equity research at JP Morgan, on a package rumoured to be worth up to $4m in the first year.

However, HSBC, Dresdner Kleinwort Wasserstein and Smith Barney in the US have reduced numbers in equity analyst teams in the past 12 months.

In December 2002, 10 Wall Street banks paid $1.4bn (€1.2bn) to settle charges that research they produced during the technology boom of the 1990s was biased by attempts to win corporate finance mandates. Since the scandal, US analysts may no longer accompany investment bankers on sales pitches to clients. The Financial Services Authority (FSA) has called for a similar ban in the UK.

Moves to distance equity analysts from winning lucrative corporate finance mandates were expected to reduce their pay. However, headhunters say this has not been the case.

Evans said redundancies helped maintain pay and boost bonuses. "The number of analysts is fewer but their quality is higher, so they will have to be paid more."

Research is also playing a more important role in proprietary trading and analysts are being rewarded according to the success of their forecasts, said Evans.

Boutiques have played a role in sustaining equity analysts' pay. Arbuthnot, a UK investment banking boutique, has hired seven analysts from banks in the past 12 months. Demand from boutiques has made banks wary of cutting pay for fear of losing staff, say headhunters.

One researcher, who moved from an investment bank to a boutique, said pay at small firms remains linked to researchers' ability to bring in other business and is not only dependent on the quality of research. "Research relationships can help bring in corporate finance or brokerage business. If there is good secondary commission flow on the back of a strong analyst, there will always be reason to pay the analyst better."

Nevertheless, the future for equity researchers remains uncertain. In the UK, the FSA is reviewing responses to consultation paper 176. This calls for the unbundling of research and brokerage costs and greater transparency on fees.

As a result, the price of equity research may be made explicit and there is no guarantee that clients will pay it.

Elizabeth Hammond of search firm Hammond Haspel said: "Equity research is in a difficult place. No one knows where it fits in."