Equity research: Down but not out

Mention the word 'unbundling,' and equity researchers are likely quake in their boots. But early indications are that the new practice of charging separately for research may not be quite as disastrous for jobs as anticipated.

According to StarMine, an analyst rating service, the number of analysts publishing research in Western Europe rose nearly 8% between January 2005 and January 2006, to over 2,900. It reports that the number of analysts publishing in the US rose nearly 4%, to some 3,440 during the same period.

Given that January 2006 marked something of bombshell for equity researchers, growth in the analyst population is somewhat unexpected. As of last month, the UK Financial Services Authority (FSA) has begun obliging brokers operating in the country to 'unbundle' fees charged for research from general brokerage fees, enabling asset managers to identify the real cost of those 'buy', 'sell', and 'hold' recommendations. The new rules must be fully implemented by June.

David Lichtblau, a vice president at StarMine in San Francisco, says the move isn't restricted to the UK: "The economics of the research department are essentially global."

He also says it doesn't augur well for analyst jobs long term: "Firms will be challenged to save costs on research. And that will likely lead to lower coverage of stocks and fewer analyst jobs."

Lichtblau is in good company. There are plenty of other naysayers when it comes to the future of equity research. Integrity Research Associates, a US independent research house, recently issued a report forecasting that banks' spending on their research departments will fall from $7.6bn last year to $5.3bn by 2009.

Tom Hutchinson, senior vice president at Integrity, says the FSA's action has turned the outlook for both the number of equity researchers and average compensation in the sector, negative.

Glimmers of hope

However, before putting a 'sell' recommendation on all equity research careers, it's worth paying heed to what recruiters say. Although none are going all out to report a slew of recruitment in the sector, no one's exactly consigning it to the dustbin of history either.

"Equity research hiring is continuing, it's just a bit more selective than before," says Alex Williams, a UK-based consultant for search firm Pelham International. "If people are going to pay for research, there's a feeling that the quality has to be good. There's still demand for the best analysts."

Richard G. Lipstein, a managing director at Boyden Executive Search in New York, reports a similar trend in the US. "Things are still happening here in equity research," he says. "It's about upgrading existing people: the demand is increasingly to conduct more research and to make it as original as possible, some of those who were promoted in recent years aren't proving up to the task."

While much of recruitment in the US and the UK has been about upgrading, Lipstein also points to the likes of Susquehanna and Piper Jaffray, who have been building up their US equity research teams. He says UBS and Banc of America Securities are likely to add in future.

Commodities and FIG analysts top the bill

Within equity research, some sectors have been hotter than others, commodities being one. When SG hired five for equity research in November, two were to cover commodities stocks. Financial services analysts are also in demand. ABN AMRO recently recruited Haley Tam from Bear Stearns to cover UK bank stocks. Andreas Weik, a partner at search firm Hoffman & Heads in Frankfurt, says German demand has been primarily for financial institutions and healthcare researchers: "It is not a dead market, hiring is growing in these areas."

Recruiters are even upbeat in France, where StarMine's data says the number of publishing equity research analysts has fallen consistently since 2003. Vally Colli, a consultant at search firm Vendômes Associés, reports an upturn in equity research recruitment, with firms such as Natexis Bleischroder looking to build in the area, and others, such as BNP Paribas Exane, Deutsche Bank and HSBC, upgrading or compensating for the effects of attrition.

Inevitably, however, there are exceptions, and Italy appears to be one. Although Starmine says the number of publishing Italian equity research analysts rose 6% over the past year, to 384, Italian recruiters say hiring in the sector is dead as a dodo. "There was some recruitment last year as second tier houses hired to increase their share of the Italian brokerage market," says Alberto Gavazzi, head of financial services recruitment at Russell Reynolds in Milan. "But there is really very little going on: the market for equtiy research jobs here is dead."