There are going to be fewer Wall Street stock analysts in the future, according to some Wall Street stock analysts.
That’s right. Research analysts who do deep dives on the future of various industries and provide stock specific calls to investors have taken a look at their own employers, and decided that their profession is at risk.
The analysts in question are a group of Bank of America Merrill Lynch analysts led by Andrew Stimpson. They published a big note on how technology is going to change investment banking, and included a section on research. It’s very meta.
“A decade ago, the main tools of the average analyst were Excel, Word, email, pdfs, Bloomberg chat and a phone,” the note said. “Today, these are pretty much the same.”
“Client relationship management systems are better, more integrated and matter more than they did 10 years ago. But essentially, the tools are unchanged.”
That is going to have to change. There are a bunch of challenges facing the analyst community. Active managers and hedge funds, the biggest payers for research, are having a tough time of it. Money is flowing quickly from actively managed funds to index-tracking funds, while hedge funds are under pressure over poor performance.
The way research is paid for is changing too, driven by new rules in Europe and the emergence of boutique research houses that have new payment models.
There are new sources of potentially valuable data that research analysts aren’t really set up to analyse. Here is Bank of America Merrill Lynch:
“There is also more data than ever before. Capturing non-traditional sources of information can make for a differentiating product that clients are willing to pay for. One of the key areas for new insights is social media. However, for obvious reasons, social media feeds raise a raft of regulatory issues (e.g. most social media websites are banned within banks).”
On the flipside, some of the stuff that Wall Street analysts have to produce is worth less now than ever.
When companies announce earnings, Wall Street analysts are required to publish the impact of this new information on their models and forecasts. This is called maintenance research.
The problem with this kind of research is that oftentimes clients are receiving almost identical notes from 30 or 40 analysts.
This is where the culling of analysts comes in. First, some of these tasks can be automated. Here is Bank of America Merrill Lynch:
“Similar to other segments of banking that are essential, but commoditized, it seems logical that in the near future maintenance research can at least be partly automated. If clients will not pay for such written analysis, then it makes sense to reduce the time spent on the task by humans, although any such products would be subject to the regulatory requirements applicable to the producing bank.”
This automation of the research function extends beyond maintenance research:
“Working in excel and forecasting company accounts could theoretically be automated as machine learning develops further. Any correlations between (say) trading volumes and equities revenues, or consumer confidence and retail sales, could be monitored by a machine, just as well as by a human.”
Given the regulatory and business challenges and the potential for increased usage of things like AI and machine learning in research, Bank of America expects there to be less research around in five years time. The logical extension of that is there will also be fewer research analysts.
Bank of America expects that scale players will survive and prosper, while boutique firms made up of top-notch individuals will also do well. The problem area is those that are somewhere in the middle.
“In a world of greater scrutiny over the value of research, we believe firms that fall between these two groups are less likely to be able to construct a platform that can sustain against the other two models,” the note said.