Sell-Side Research: Merrill Appears Deluded

On March 22nd the Merrill Director of Equity Research, Candace Browning,  penned a memo regarding the state of equity research and some strong actions Merrill is taking to protect the value of their research product for clients. Having been there and done that at one time it certainly made us chuckle.   Beyond humor value I wonder if their actions to try and restrict access will work at all and if it signals any sort of coming shift in the economics of the business. The memo itself shows a remarkable lack of awareness of the business today as well as misstatements about how healthy it is.

It starts out in a surprised tone regarding the fact that Merrill research is broadly available to the public just after it comes out.   How can you be shocked by this?  It’s been a fact in the business for at least five years and has spawned many unsuccessful efforts to stem it.  In fact most of the client value delivered by sell-side brokerage analysts comes via their verbal dialog, voicemails, conferences and management access, rather than published research and ratings changes.

Still Merrill states their are going to terminate research access by non-clients, increase access restrictions and delays for media access, eliminate licensing agreements unless they can be done at higher, non-eroding prices (whatever those may be.)   It’s odd seeing this from Merrill since the one obvious value their research has over others is it’s broad reach (no matter the content) and the fact that many institutional and retail brokers rely on it. Taking that away leaves little, if anything, of value.  This as opposed to some of the other banks which have indeed improved and created some true value-add in their research content.

The other part of the memo is just misinformed over the perceived value of street research.   The claim that recommendations produced a global return of 19.5% versus 16.2% for the MSCI is empty given way changes are effectively backdated and not measured by actual stock transactions.  Citing 42% total commission allocation to high-quality sell-side ideas (Greenwich Associates) doesn’t translate into anything meaningful for Merrill since they are a liquidty provider rather than an idea shop like Piper Jaffray, American Technology Research, or Majestic Research. 

Lastly nothing that hedge funds allocate a great percentage (55%) of their commissions to research has more to do with them spending on special providers (Gerson-Lehrman), consultants and industry research groups rather than the street.  New providers of investment research services like Monitor110 will garner more of these research dollars in the future.

Having been there and done that I understand the need to try and trumpet the value of sell-side research and make people think they need to pay up for it.  Of course it rings absurdly hollow this many years into the decline and coming from Merrill lacks any credibility.  Merrill has been working to reduce their research costs for years and views it as a pure cost center.  Merrill analysts are measured on market capitalization under coverage rather than ideas and spend the bulk of their time fielding calls from sales, marketing themselves to clients to get votes and dealing wtih the kafka-esqe legal and compliance systems part of broker-dealer operations today.

Does the memo signal anything new for the broker-dealer research industry?  If so I’d love to hear about it!