Wall Street research is dying.
All you need to do is ask some Wall Street researchers.
On Monday, Matt Turner highlighted work out of Bank of America Merrill Lynch that outlined the ways many of the traditional functions of Wall Street analysts can be automated.
The challenge, then, is how you create value — or in investment parlance, alpha — for your clients.
UBS’ answer? Bring in psychologists.
According to a report in The Financial Times, UBS has brought in psychologists, as well as experts from fields like pricing and shipping, to complement the firm’s research process.
Juan-Luis Perez, head of the firm’s global research arm, told the FT that research analysts need to “ask better questions.” Which is another way of telling employees clichéd ideas about what does or does not work in investing, or what is or is not happening in markets, is just not going to cut it anymore.
Last week, analysts at Bernstein caused a stir by arguing that the rise of passive investing is worse than Marxism.
And while this call got a lot of attention because, well, nothing gets Wall Street’s God-fearing capitalists excited quite like references to Karl Marx, the point made by Bernstein is that markets are facing a dearth of properly incentivized participants to function like markets.
Passive investing, the argument goes, simply encourages investors to plow money into an entity — The Market — that isn’t motivated by anything at all but merely represents the output of certain motivated entities. The problem this creates is that by declining to make judgments on each of the market’s entities but merely capture the gross return provided by this agglomeration, passive investing leaves with a lump of unproductive nothingness.
Marxism, in Bernstein’s view, at least serves the aims of a government that distributes the gains among citizens.
But the other side of this note is that by arguing for the merits of active investing, Bernstein is protecting their own trade.
Here’s Bernstein (emphasis mine):
Ultimately this goes to the heart of the question, what is the social function of active management in equity markets, and indeed of sell-side equity research? In the wake of the financial crisis we think it is even more important than normal to demonstrate that there is indeed a social function. A field of endeavour that performs no social function is ultimately unsustainable if it has a cost that is imposed on the rest of society. Any such activity will, in the ultimate analysis, simply be regulated out of existence. However, there is a clear and distinct task that active management (and, by extension, sell side research) performs. This is in the allocation of capital either directly through the raising of capital in primary markets or else indirectly in the information discovery process. This is a laudable task and needs to be recognised.
As the UBS news makes clear, however, Wall Street is having a hard time convincing its clients that this is indeed the case.