Investment Analyst As Advisor? Financial Advisors' Daily Digest

by: SA For FAs

Summary

Banks and brokerage firms are expected to cut analyst jobs by a third. Where will this army of CFAs go?

Kevin Wilson sees bonds as the best contrarian play – again.

720 Global: Economic forecasts must accord due weight to growing public and private debt.

The Financial Times ran an interesting story on Tuesday reporting that banks and brokerage firms are slashing investment-research analyst jobs. One firm that tracks this industry estimates that the approximately $16 billion budgeted for investment analysis will be slashed by a third in the coming years.

Such a trend may be of particular interest to Seeking Alpha readers, who generally get their investment research for a much more affordable price, i.e. for free. Indeed, it's no industry secret that investment firms often found their research analysts to be of value primarily when giving glowing reports of companies whose underwriting business they were seeking.

When the resultant scandals limited that particular conflicted behavior, analysts subsequently found themselves valued for the meetings they could arrange between money managers and corporate managers. The FT article notes that the procuring of such meetings not so subtly signals the need to flatter the companies they cover in order to maintain access.

There always was something askew about the research analysis business. The first time I ever visited a mutual fund manager's office, about two decades ago and prior to electronic delivery of research reports, I met a fellow whose office was stacked high everywhere with thick analyses of a zillion companies. Nobody could ever read all those reports. And even were one to hand over the report, the manager was too busy monitoring prices on his computer screen, trying to catch favorable trading moments.

Granted, other portfolio managers are more interested in analysis and less in trading. But I was not surprised to see in the FT report that "the amount of research actually consumed is depressingly low, with some industry insiders estimating that only between 2 percent and 5 percent of all reports produced are actually read."

That sounds plausible. What that suggests to me is that, indeed, this profession's numbers are due to come down. I know that many research analysts are people of integrity, but their employers on the sell-side were generally using them for their own ends, and getting less mileage out of them now. The question that interests me is where they will go. Will we see a surge in CFAs joining their CFP cousins (and relatives with other designations) in the financial advisory space?

The FA industry seems to be more spacious. The industry is demographically challenged, with younger advisors slow to take their aging mentors' places. It's also a tougher field to navigate with changing regulations and rising thresholds for profitability, making it harder for entry level professionals to join the ranks. Yet, while brokerage firms are beginning to feel they can do without their analysts, advisors remain in demand on Main Street. What's more, quite a number of retail investors are still attracted to the find-me-the-best-stock-approach, which analysts believe they have the tools to accomplish.

Do you see an opportunity for former analysts in the advisory industry? Let us know your thoughts in our comments section. Meanwhile, here are a few advisor-related links: