Despite recent revelations about conflicts of interest within investment banking firms, US institutional investors still value Wall Street equity research. Or so claims Greenwich Associates, who interviewed 1,262 equity analysts at the largest equity investing institutions in the United States earlier this year.
However, Greenwich consultant John Webster does say that the conflict of interest problem, coupled with the weakness of the equity markets, is “likely to force major changes both in the way institutions use Wall Street research, and in the way Wall Street makes its research available.”
When Greenwich Associates analyzed the number of brokers considered important research providers, and the quality ratings awarded to each broker’s research by more than 1,250 institutional analysts, it was found that no major firm has dropped from sight. Meanwhile, concurrent research conducted with more than 250 U.S. portfolio managers reveals a considerable increase in the percentage of their commissions allocated to sell-side research. Yet the situation does not merit complacency, warns Greenwich, and sell-side analysts need to demonstrate their independence more than ever before to stand out from their peers.
“While the practices of certain broker analysts have been reprehensible, those of the great majority are beyond reproach – and they provide presently irreplaceable value to the institutional investment community,” notes Webster. “However, Greenwich Associates research reveals that they do so in ways that may not always be apparent to politicians or the public.”
Greenwich says that, contrary to the general perception of the way Wall Street works, broker recommendations for stock purchases and sales play a very small part in relations between the sell-side and institutional buyers, obtaining about 5 per cent of institutional research commissions. By contrast, analyst service more generally gets nearly 20 per cent of institutional commissions, while studies of individual companies and industries combined get nearly 25 per cent more.
“Rather than asking for stock picks, institutions recognize that sell-side analysts closely follow the key companies in their sector,” consultant Jay Bennett says. “They are asking what makes these companies key – and why.” He reckons sell-side research is critical to buy-side analysts because in-house equity analysts are being asked to cover more industries (5.1 per buy-side analyst on average in 2003, up from 4.6 in 2002) and companies (59.7 companies in 2003, up from 47.7 in 2002) than ever before.
This is all happening, says Greenwich, at a time when the average number of domestic equity analysts at all U.S. institutions is falling marginally, from 8.9 in 2002 to 8.6 in 2003. At the largest institutions, those with more than $10 billion in U.S. equity assets under management, U.S. equity research staffing was flat at 14.9.”Buy-side analysts are under incremental stress,” John Webster concludes. “They have more to do and there are generally no more of them to do it.”
For those buy-side analysts that remain, total cash compensation reported by more than 700 U.S. institutional equity analysts was flat year-on-year. The average salary in 2002 was $137,000, up fractionally from $135,000 in 2001. The average bonus, or expected bonus, remained unchanged at $141,000.
Geographically, analysts in the New York City area are compensated best, with reported 2002 total earnings of $383,000. Baltimore and Washington D.C. analysts averaged $303,000 in total earnings, and those in Chicago took in $291,000 on average.
Interviews were conducted from December 2002 to March 2003