The darkest hour of sell-side research.
Author: Li Husheng | Head of Fund Research, Zhixin Research Company
Pay attention to the "asset management cloud" and accompany the career growth of financial personnel!
Friends, do you remember the bloody incident that caused a sensation in the circle at the end of November? That is, the Shanghai sales of a brokerage company accidentally sent a PPT analyzing customers to a large group of customers, and the PPT wrote that the fund manager of a certain fund company likes activities and likes to receive gifts. Subsequently, the fund company has suspended the brokerage commission.
No, the initiative to rectify the chaos of the brokerage research institute from the root has come.
On December 8, 2023, the China Securities Regulatory Commission (CSRC) announced the Provisions on Strengthening the Administration of Securities Transactions of Publicly Offered Securities Investment Funds (Consultation Paper), which is mainly divided into three categories: the first is to reduce the commission rate paid by public funds to securities firms, the second is to reduce the upper limit of the distribution ratio of public fund trading commissions, and the third is to prohibit the linking of trading commissions to fund sales and the payment of "soft commissions" (third-party transfer payments).
The documents are all talking about public funds, but each one is poking the lungs of the brokerage.
This is the second rate reform in the public offering industry, but it is actually painful in the hearts of brokerages when it comes to public offerings. The supervision is to reduce the fee of the public fund, but the rectification is the chaos of the "commission distribution point" of the brokerage research institute.
The darkest hour of sell-side research
In fact, the brokerage research institute has also had difficulties. But the difficulties in the past have not been as painful as this one. In the past, the difficulties mainly said that the market was not good, and the so-called big year and small year were nothing more than layoffs and salary cuts in big years, and salary increases in small years.
But in any case, the emaciated camel is bigger than the horse. Brokerage research institutes are considered to be the pearls of the pyramid, and the brokerage is the highest income group. In the past, the director of the brokerage research institute and the chief of the industry were all frequent visitors to the financial media pages, and the titles were often embellished with words similar to "tens of millions of salary poaching".
In fact, the gray space of the sell-side research model of the brokerage research institute has long been well known to industry insiders. I still remember that in 2020, I read an article that made my bank very profound, called "Ten Years of Ups and Downs of Seller Research, Wash Up and Wash Away to the "Crossroads"", this article details the chaos of seller research, and believes that the positive industry is misconductful, the gray industry is rampant, and the assessment is alienated, and many people are competing for Vanity Fair.
Although there have been repeated regulatory orders, this phenomenon has not changed. This time, I shot at the root.
In fact, the content of the "Provisions" is very simple, that is, to further reduce the securities transaction commission rate of public funds, continue to improve the securities transaction commission distribution system, strengthen the supervision of the securities transaction commission distribution behavior of public funds, and further optimize the rate disclosure mechanism of the public fund industry.
There are many contents of the "Provisions", but there are several core impacts:
1. In principle, the stock trading commission rate of a passive equity fund shall not exceed the average stock trading commission rate of the market, and other expenses such as research services shall not be paid through the transaction commission;
This article directly divides ETFs and active funds, and it is important to know that ETFs are the best tool for brokerages to wrestle with banks and head third-party sales companies in fund sales. Usually, when each fund company debuts an ETF, it will exchange the size with the agency broker based on the trading volume, but now this part cannot pay the research fee.
2. The fund manager shall select a securities company with good financial status, strong trading ability and research strength to participate in securities trading.
Resources are once again converging on the head companies. Brokerages with weak overall strength cannot rely on research business to obtain trading commissions, and it may be difficult for many small brokerages to enter the "white list" of fund companies in the future.
3. The fund manager is strictly prohibited from linking the selection of securities companies, the leasing of trading units, and the distribution of trading commissions with the scale of fund sales and holdings, and it is strictly forbidden to use trading commissions to transfer and pay fees to third parties, including but not limited to the fees arising from the use of external expert consultation, financial terminals, research platforms, databases, etc.
The model of exchanging trading commissions for sales that has lasted for more than ten years will be unsustainable, and only by expanding the number of holdings can we really make money in the future, and the common "soft commissions" in the industry will also withdraw from the historical stage.
According to market estimates, based on the data at the end of 2022, after the implementation of the "Regulations", the total commission for stock trading of public funds will drop from 18.868 billion yuan to 12.636 billion yuan, a decrease of 33.03%, saving investors 6.232 billion yuan in investment costs every year.
It doesn't seem like much, but this is already the second round of rate reform.
As early as July 7 this year, the China Securities Regulatory Commission issued and implemented the "Work Plan for the Rate Reform of the Public Fund Industry", and the newly registered active equity funds uniformly implemented the upper limit of "management fee rate not exceeding 1.2% and custody fee rate not exceeding 0.2%". At the same time, 136 fund managers in the industry have successively issued announcements to reduce the management fee rate and custody fee rate of their stock active equity public fund products to below 1.2% and 0.2%.
On a daily basis, based on the scale at the end of June 2023, the public offering industry will save investors a total of about 14 billion yuan per year.
20 billion can be dropped so much.
The regulator is satisfied with the results, and the fund company can also save a lot of costs every year, so it should also be satisfied.
But the brokerage research institute doesn't think so. After all, the commission income of public funds has always been one of the important sources of profit for brokerage research.
Therefore, the difficulties faced by the brokerage research this time are different from the past. The underlying profit model has been hit hard, which may bring fundamental changes in personnel, mechanisms and organizational structure.
What is the way forward in the 3.0 era of the brokerage research institute?
If we divide the development process of the brokerage research institute into several stages, the 1.0 era must be the "internal service" before 2000.
In Li Xunlei's recollections, it is not difficult to find that in the past, the institute has always focused on internal services, but internal services are free, therefore, it has attracted unlimited demand, but the supply is limited, and in the absence of incentives, there are also problems with the quality of supply.
Therefore, Li Xunlei found that the research institutes in the past were unexpectedly idle: after the research report was written, he did not know who to use it; some company research reports could basically be excerpted from the annual reports of listed companies, and many researchers did the work of scissors and paste.
This is because at that time, the brokerage industry was not clear about what to do and what to do in research, and it was only known that foreign investment banks attached great importance to research, and the institute was in the stage Xi of exploration and learning, which caused confusion in the company's positioning.
Although there are also research institutes that have begun to take advantage of the division of labor and research in the industry, selling reports to earn income. However, most of the reports were bought by the sales departments of other securities firms, but this caused opposition from many departments of the company, and some people believed that the valuable research reports provided by the research institute only needed to be provided to the company's proprietary or asset management departments.
It seems that as long as the brokerage research institute can serve the company well.
That didn't change until the beginning of 2000, when the fund industry was booming, and with the explosive growth of fund size, sell-side research was further derived.
The brokerage research institute also took the opportunity to enter a period of rapid development, and further shared the cake of public funds through industry research, which opened the era of brokerage seller service for more than ten years.
The model is also very simple, the brokerage research institute provides research services for mutual funds to earn corresponding research commissions, and is mainly paid through securities trading commissions.
By 2022, the total commission income of brokerage funds will be 18.874 billion yuan.
However, in the past three years, the trading commission of public funds has been declining, and the commission reduction is the general trend.
Wind data shows that in 2020, 2021 and 2022, the transaction commission rates of public funds in the whole market will be about 7.86/10,000, 7.85/10,000 and 7.58/10,000, showing a downward trend as a whole.
In fact, it is not difficult to find that the same is true with reference to overseas experience.
In the United States, for example, in the 1950s and 1980s, with the rise of institutional investors such as mutual funds, research services became extremely important. Especially after the SEC abolished the flat commission rate and allowed price competition, the additional attribute of sell-side research has become the best way to compete in business.
Moving into the 1990s, Wall Street sell-side analysts became increasingly influential, penetrating from the secondary market to the primary market and could directly influence transactions.
It wasn't until the Wall Street analyst scandal erupted in 2000 that it triggered a regulatory overhaul of the entire industry, which turned sell-side research into a sunset industry.
This also raises a key question, does the market really need sell-side research?
It's a very pitiful topic, and you can find a good reason for it or not.
However, in recent years, with the buyer's institution continuing to build its own research team, the core competitiveness of the brokerage research institute is gradually weakening, and this situation also exists in the United States: in the past 20 years, the buyer's own research team has become bigger and bigger, and it gradually does not need to rely on the seller's research services, and there is no need to pay expensive research commissions.
This is why the soft commission is derived, and the institute serves the buy-side institution through some additional services, including the purchase of expert consulting services, financial terminals such as Wind or Flush, databases such as Bloomberg, etc., and the fees incurred are still paid with trading commissions.
If the value of research services is high enough, why bother?
epilogue
In fact, standing at the current point in time, the draft for comments is obviously to cut off this road, not to mention that it is also narrow, and the rectification of public fund trading commissions is ostensibly to regulate public funds, but in fact it is to rectify securities firms.
If the sell-side research model is regarded as the 2.0 era of brokerage research institutes, then where is the 3.0 era?
Is it to continue to strengthen its own strength, compete with its peers, and carve up more cakes?
Or is it to withdraw from the crowded track and focus on a certain feature?
Or do you want to give up sell-side research and return to internal service?
But it has to be said that the "good days" of the brokerage research institute have passed, and it is inevitable to lay off employees or reduce expenses in the future.