Saving Sell-Side Research

While the news on sell-side equity research could hardly be any worse, Booz Allen believes that sell-side firms will remain the dominant research providers to the buy side.

Sell side research's investment banking linkage has been constrained as a result of the global settlement with regulators. Its economics are further depressed by decreased trading commissions, which have fallen by approximately 50 percent in the last five years, and by the fact that some buy-side firms are seeking unbundled trading from research.

There are also regulatory pressures, led by the United Kingdom’s Financial Services Authority (FSA), in transparent reporting of commission-related services. Finally, there's increased buy-side interest in, and sell-side funding for independent research. Industry experts forecast that sell-side research revenues of approximately $5 billion will fall by up to 50 percent in the next few years.

Despite this bleak reality, Booz Allen Hamilton believes that sell-side firms will remain the dominant research providers to the buy side, even in the face of competition from independent research providers and buy side’s own research staff. Granted, industry capacity will adapt to the emerging economic reality: One hedge fund manager predicts that the industry will have "10,000 instead of the current 25,000 analysts." But the sell side's unique strength in research will remain.

Leveraging their scale and relationships, winning research providers will offer new products, services, and distribution formats to best serve buy-side needs.

The Booz Allen study is entitled "Saving Sell-Side Research."

study posted June 22, 2006