City firms are cutting back on analyst roles due to new rules governing interactions between money managers and advisors.
A new survey released by the CFA Institute on Monday found that MiFID II rules are leading to a squeeze on research budgets and analyst roles, which are some of the most common starting jobs in finance.
MiFID II is the second Markets in Financial Instruments Directive, a set of European Union rules governing investment services. The CFA Institute, which certifies investment professionals, surveyed over 12,000 investment professionals in roughly 500 firms across Europe to find out what effect MiFID II rules have had since coming into force at the start of 2018.
The survey found that 54% of sell-side firms — typically banks and brokers that sell services — reported a reduction in the number of analysts employed. Analysts cover specific industries and stocks, and produce research notes with investment advice for money managers.
Buy-side firms — asset managers and investment funds — are meanwhile reducing their budgets for spending on research by an average of 6.3%, according to the survey.
One of the biggest changes under MiFID II was to “unbundle” services sell-side firms give to the buy-side. Banks and brokers used to give research notes on companies away for free, seeing them as marketing that could encourage buy-side clients to do more trades with them. The funding of this research was subsidised by revenues from other divisions.
However, MiFID II rules dictate that buy-side firms must pay for all the research they receive from banks. Meetings between buy and sell-side participants must also be clearly audited and paid for.
“MiFID II has brought transparency and competition to the investment research business,” Rhodri Preece, head of industry research at the CFA Institute, said. “But as asset managers have absorbed research costs, we have seen a notable reduction in research budgets that is causing a shake-out among research providers.”
Stockbroker Daniel Stewart fell into administration earlier this month. Other UK mid-market brokers remain under pressure with high regulatory overheads and depressed market activity.
“Independent and sell-side research providers are under pressure, which we see translating into reduced research coverage, particularly in small and mid-cap equities, and fewer sell-side analysts,” Preece said.
The CFA Institute’s survey found that 47% of buy-side respondents and 53% of sell-side respondents reported a decrease in coverage of small and mid-cap stocks.
Buy-side clients said the quality of research they do receive is largely unchanged post-MiFID II. Conversely, 44% of sell-side firms said they think the quality has reduced.
Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.