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?
'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?'"
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.
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.
