BlackRock Shrinks Its Research Spend. Good News For Us Independents!

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Includes: BAC, BK, C, CS, GS, JPM, MS, UBS
by: SA Eli Hoffmann

Summary

Soft-dollar payments are shrinking.

This will level the playing field for investment research providers.

The SA Investor Marketplace and others are supporting independent research providers by offering them a way to build a subscriber base without having to work on Wall Street.

BlackRock (BLK) may have just accelerated the demise of sell-side research as we know it.

Reuters digs into BlackRock's filings and discovers this:

BlackRock Inc, the world's biggest asset manager, slashed the amount it paid out in commissions to Wall Street firms for research by more than half for its largest mutual fund over the last two years, according to filings.

The cuts show the immense power large asset managers have to curb fees they pay banks and the diminishing role of sell-side research at a time when Wall Street firms are facing a slump in stock trading commissions.

Perhaps its traders simply traded less? Nope:

The commissions fell even though the BlackRock fund routed roughly the same level of transactions to brokerages in exchange for access to their research notes and other related services.

This is bad news, of course, for the sell side, and for many analysts who depend on "soft-dollar" generosity to earn their healthy salaries.

In many cases, the shrinkage has begun. Via our news team:

Hong Kong-based CLSA let go 90 U.S. employees on Monday, most of whom work in research. Among the analysts looking for a new landing spot are the banking sector's Mike Mayo, and tech's Avi Silver and Ed Maguire.

Research shops are already under revenue pressure, and also face a proposal in Europe to make clients pay for investment analysis separate from trading commissions. CLSA CEO Jonathan Sloane says this move wasn't directly linked to the so-called MiFID initiative, but he's not a fan of the idea.

FBR is also under duress. Via FT:

Paul Miller, who worked until Wednesday at FBR Capital Markets, is more pessimistic on the future of the industry: “There’s just not a lot of money in sell-side research for [independent] broker-dealers any more because the bulge brackets give it away and it’s a loss leader for them. I’ve seen this coming and I’ve been preparing.” Mr. Miller, 55, plans to take some time off and plot his next move.

On the other hand, this is not bad news for equity research. If anything, it is leveling the playing field. Faced with the prospect of having to put a "hard dollar" value on the research they receive, consumers are now considering "alternative" solutions. Back to Reuters:

Asset managers have gained leverage because they have an increasing variety of choices of trading venues and research providers, including independent firms unaffiliated with the big banks.

Will the pressure on research dollars prove a boon for the SA Investor Marketplace? I think so. A friend contends some of the misplaced talent will end up here:

My guess is that the amount SA pays for research is competing more with Wall Street each passing day. It would be great if SA were the landing spot for some of this fired talent.

There's that, and the fact that not all of the talent is on Wall Street to begin with. With soft dollars shifting to hard dollars, and the inevitable focus that will bring to getting real value from their research spend, the playing field will become more of a meritocracy and will favor those who provide real value, rather than those who sit at the right firms.

As I wrote in a recent article about the SA Investor Marketplace, which supports independent research providers who are out there trying to help investors:

People have always paid for value, and will continue to do so - content or otherwise. But the value must be real, and the value proposition must be simple and direct. The Marketplace model, which forces authors to build real followings on Seeking Alpha, and then offer those followers membership in their private community for a monthly fee, has no shortcuts. Take your readers seriously, and understand what they value, or you fail.

Interested to hear your thoughts about the future of investment research, and SA's role in it. Please share in the comments.