The end of broker research?

Brokers have yet to learn that it's quality, not quantity, that their clients want. This, along with higher direct costs from the unbundling of broker research, has cut demand from fund managers. Monday's FTfm weekly reports that Sell-side research heads for extinction:

The quality and relevance of equity research provided by investment bank analysts to fund managers is falling, leading to predictions that some brokers will close their research divisions. Evidence of the waning influence of analysts was provided by a report that found two-thirds of the research received by the UK's top 50 fund managers was irrelevant.

The report, by APR Smartlogik, an information management company, revealed that fund managers yearned for better research - three-quarters of them said they would opt to receive more information if it were tailored to their needs.

A 2002 report by APR based on the same sample found that more than half the information received by fund managers was relevant to their needs, indicating a decline in quality over the past four years.

Jeremy Bentley, chief executive of APR, said ...analysts sent about 1bn messages a year to fund managers and had spent vast amounts on web portals. But most of the information was badly targeted and the websites were often difficult to navigate.

This lack of precision is likely to further impact research divisions at a time when they have been severely scaled back. The walls that have been erected between investment banking and research following US rules designed to prevent conflicts of interest, have reduced the value of analysts. Their bonuses are no longer linked to broker commissions and many of the best ones have left to join fund management and hedge funds.

From 2004-2009 fund managers will cut spending on sell-side research by 28 per cent from $5.4bn to $3.9bn, according to Integrity Research Associates, a US-based consultancy, in another report last week. In contrast, fund managers will double their spending on internal research from $2.2bn to $4.9bn and also double spending on independent research from $1.5bn to $3.1bn.

Louis Thompson, chief executive of the US-based National Investor Relations Institute, predicts a shake-out. "We will no longer have sell-side research five years from now. It will be replaced by internal research and independent research."

Mr Thompson pointed to a survey of 75 of the US's top chief investment officers, carried out at a conference in San Francisco. Just 8 per cent said sell-side investment banks were the primary source of equity research.

...Independent research firms believe they are better at targeting fund managers. Richard Kramer, managing director of Arete Research, said: "At investment banks, analyst views are linked to proprietary trading desks, which provide their biggest income. Their clients moan that their inboxes are full of e-mails from brokers and they can't be taken off distribution lists. They are obliged to take a one-size fits all approach. We prefer to put out a few thoughtful reports a week."