The 5 Things Buy-side Analysts Value Most from Sell-side Analysts
If you go to just about any store, restaurant or service provider, you’ll come across a price list. Even if you’re seeking an elaborate, customized service like planning a wedding, it’s not too difficult to get a list of prices to help weigh the benefit versus the cost of each option. Can you think of an industry where there is no price list? Look no further than sell-side equity research.
It might seem implausible, but this lack of transparency has caused great angst for regulators, as evidenced by MiFID II in Europe. It creates significant challenges for those who manage sell-side research departments as well as their analysts because it’s not clear what clients are paying for. This quandary is the equivalent of a wine shop selling only unmarked bottles of wine, never knowing which ones were liked and which were poured down the drain…creating a challenge for the shop owner, not sure which wines to restock.
The lack of service-level pricing creates an added layer of complexity for sell-side analysts to service buy-side analysts, because they don’t know what’s of value and what’s a waste of time
To help put some parameters around this problem, I recently visited with Jay Bennett of Greenwich Associates, because his firm conducts more research in this area than about anyone else. Here are some of my conclusions based on the numbers shared with me from one of their recent studies (based on U.S. only data):
About 60% of the equity commissions generated by sell-side firms are for providing “advisory services” which is a catch-all that includes just about everything the sell-side analyst and salesperson provide the client, including corporate access. If you’re wondering where the other 40% goes, it’s mostly for sales trading and agency execution. The good news for the sell-side is that the advisory services have grown from 58% of the pie two years ago to 61% in the most recent period (although this doesn’t address the size of the pie which has been shrinking).
My interest lies more deeply within the 61% figure; specifically, what does the buy-side analyst value from the sell-side analyst?The entire breakdown can be found in Exhibit 1, which is interesting, but still doesn’t clearly help sell-side analysts understand how to allocate their time, because it includes activities outside of their control (e.g. sales, economic analysis, data services, etc.). And so I created Exhibit 2, which should provide sell-side analysts a template on where to focus their efforts.
Exhibit 1: U.S. Buy-side Advisory Allocation for Sell-side Research, Sales & Corporate Access
Exhibit 2: U.S. Buy-side Advisory Allocation for Sell-side Analyst-Specific Services
It’s a close tie between “analyst service” and corporate access (each about 30%), which couldn’t be further apart. I consider the former an indication of the analyst’s research quality and ability to proactively reach out to clients, while the latter more about being a travel-agent for company management (quite a mindless, although important task).
Working clockwise around Exhibit 2, I mentally combine the next and last categories together because they represent the written output of analyst’s efforts. While they make up 23% of the value, it’s important to note that servicing clients is even higher. It’s paramount analysts conduct high-quality research, but they need to be careful not to forget to proactively reach out to clients on a regular basis. Producing one high-quality piece of research a month, followed with 100 client calls, likely provides more value than producing two high-quality reports with only 50 calls that month.
Moving onto the last slice of the pie, I’m a big fan of conferences and seminars if done right. The buy-side doesn’t want canned, pre-packaged company-management presentations of previously-released information. When I was an analyst, I hosted the industry’s largest conference in my space (over a thousand attendees over 4 days), which unfortunately followed the useless format mentioned above, but I didn’t have much say in the matter because the conference generated plenty of investment banking revenue for my firm. However, most of my heavy-hitter clients didn’t attend for reasons mentioned above.
My preference at the time, and for the years to follow, was to host smaller topical seminars, often attracting only 50-100 clients, which were much more valued by the clients because they yielded insights not found anywhere else. Producing 4 insightful field trips or topical seminars each year for 25-50 of your best clients is likely to yield much more commissions for your firm than hosting one conference for 250 clients where management parades through rehashing the company’s most recent quarterly calls.
In closing, if you’re a buy-side analyst, I strongly encourage you to let your sell-side counterparts know what you appreciate, because there are many sell-side analysts out there not sure what you want. And if you’re one of these sell-side analyst not sure what to deliver, I recommend creating great content first and then focusing on the largest slices of the pie where you know you can differentiate yourself versus the competition. After you dominate one slice, move onto to the next.
Let me know if this Best Practice Bulletin™ helps and how I can improve upon this best practice. If you’re interested in exploring this topic further, AnalystSolutions provides equity research training with specialized coaching to help sell-side analyst improve their effectiveness with clients.
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©AnalystSolutions LLP All rights reserved. James J. Valentine, CFA is author of Best Practices for Equity Research Analysts, founder of AnalystSolutions and was a top-ranked equity research analyst for ten consecutive years