It turns out people like bullsh*t research.
Well, not really. Let me be more specific. It turns out people like to laugh at bullsh*t research.
A few weeks back, I started a new series here on Heisenberg Report that I thought might have a significant amount of comedic value and thus would be conducive to high click- through rates. As it turns out, I was right. A lot of people read the first three installments of “Bullsh*t Research” (here, here, and here).
Recently, I penned a related post called “Must Read: Wall Street Explains Why We All Need Wall Street.”Apparently it was not in fact a “must read” because far fewer people read it than read the three posts linked above. It seems Wall Street blooper reels are more user friendly than serious discussions about the value of professional research.
But as noted, all of the articles linked here are related and essentially explore the same question: how valuable is Wall Street research? That, in turn, leads to another important question: how valuable is professional investment advice in general?
The latter question has been definitively answered if you buy the old “money talks” adage. As I showed you earlier, investors are fleeing actively managed mutual funds for passive equity ETFs in a trend that’s become so ubiquitous that it wouldn’t be worth mentioning were it not for the implications it carries in terms of flows.
But the former question (i.e. do we still need Wall Street research?) is still open to discussion.
I contend that Street research still serves a valuable purpose. As you can probably imagine, I’m partial to macro and asset class-level analysis as opposed to individual equity research, but at the end of the day, I’m certainly inclined to say that we would, as a community of investors, lose something if Street research disappeared altogether. For those interested in still another attempt on my part to justify what analysts do, please see “Have Fun Being Your Own Weatherman: The Argument For Not Firing Wall Street.”
So having spent so much f*cking time on this subject, and considering the success of “Bullsh*t Research,” I’d be remiss if I didn’t highlight the following out on Tuesday from Bloomberg’s Lisa Abramowicz.
The idea of paying $10,000 for a single phone call with one analyst sounds outrageous, but beyond the headline exorbitance is the real question of how much financial research is worth.
It has been tremendously difficult for banks to put a price tag on their research. After all, it’s rarely easy to put hard, fast numbers on the direct profitability of such ideas and information. What if that $10,000 phone call helped an investor earn $1 billion? Or even $1 million? Then it would be considered cheap.
Investment managers have traditionally paid for research as part of their relationships with banks, obscuring the need to put a hard figure on this fuzzy field. But that’s about to change, and quickly, because at the beginning of next year, European banks will start charging asset managers specifically for research, as prescribed by the second Markets in Financial Instruments Directive.
Under this rule, big investors such as BlackRock, State Street and AllianceBernstein will need to pay for research through profit-and-loss or payment accounts, according to Bloomberg Intelligence’s Sarah Jane Mahmud and Ben Elliott. These firms will most likely end up producing even more of their own research rather than pay an additional fee to big banks. Some independent research providers, including Autonomous, Morningstar, Markit and Edison Investment Research, stand to gain market share in this environment, the Bloomberg Intelligence analysts noted.
Financial firms are bandying about prices and packages, with some banks proposing $10 million a year for complete access to research or up to $10,000 for a phone call with a top analyst, according to the Financial Times. Global banks may likely follow these rules even outside of Europe as a way to simplify their compliance efforts.
These new rules will most likely accelerate these cuts because asset managers are in no mood to shell out for research. Their fees are rapidly shrinking, and they’re merging with one another to lower costs. With asset managers being forced to justify every expense, no one is going to want to explain that $10,000 phone call. It’s more likely that these investment firms will err on the side of cutting research rather than risk paying too much for it. In fact, almost 70 percent of respondents to a 2016 Bloomberg survey expect firms to reduce their research expenses in coming years.
As always, I encourage you to never, ever pay the going “Street” price when you can get the Heisenberg product for half off…