I sat on a panel today at NIRI (conference for IR) today in Fort Lauderdale and the topic was the changing role of the sell-side analyst. My fellow panelists represented the differing viewpoints of independent research – and a client – but the consensus was the same. The sell-side is going through radical change.
The problem started 30 years ago with commission deregulation – the day when how much a broker was paid to trade a share of stock was no longer regulated. As you can see from Rick Hanley’s chart here — the price of a trade has dropped continuously. Trading volume and investment banking were the two sources of funding for sell-side research — for the first the price per trade has plummeted, for the second Elliot Spitzer put up a wall between IB and research — and so the business model of traditional sell-side research within the big broker dealers is broken.
The net result is, unlike in the internet bubble when sell-side analysts were rock stars, now many of them have left and either gone into the buy-side or have set up their own research firms (or retired). Howard Penney from Research Edge talked about their new independent research model – clients just subscribe to research – no trading. Rick Hanley talked about his new service for management access (and how they partner with us) and Tom Digenan from UBS was the sole representative of the customer side. I was the lone techy (in a service intensive group) but rounded out the picture with the rapidly changing toolsets that are available.
In the end after much discussion and many questions from the IR professionals on how to use the sell-side it became clear that sell-side research is here to stay – but – and this is the but of change – it’s only one piece of the puzzle and is no longer the exclusive way to get to management – so IR has to learn to work with the other independent research and technology providers.
It was also clear the sell-side is not being careful enough of their company relationships. One of the IROs in the audience (who is IRO for a major cosmetics company) told me she is so frustrated with the sell-side she is ready to cut them out. Her complaint is that she can’t get the meetings she wants, with the investors she wants, through the sell-side because, at the 11th hour, they will swap out the institutions she wants her CEO and CFO to meet with and swap in their highest trading clients: the hedge funds.
There is clearly a role for unbiased management access now.