One of the key beliefs held by many Wall Street investment banks and broker / dealers over the past 30 years is that the equity research business is critically important to attracting and keeping clients — whether it was institutional investors in the late 70’s and 80’s, or investment banking customers in the 90’s.
Unfortunately, now in the post-Settlement era, the real question isn’t whether equity research is important, but rather can Wall Street afford to fund equity research based on today’s economics and the lack of a viable business model.
According to data collected by Sanford Bernstein, the average equity research budget of the top eight investment banks was over $210 million per firm per year in 2003 — excluding legal, compliance, and corporate overhead. Based on our own estimates, this would put Wall Street equity research budgets at over $390 million per firm, or in excess of $190,000 PER YEAR PER COMPANY UNDER COVERAGE.
With equity commissions on the wane, ECN use on the rise, and the inability to support equity research with investment banking, some might ask if it makes financial sense to continue producing Wall Street equity research.
Perhaps this is one reason that rumors continue to persist that a few venerable Wall Street firms question whether they should continue funding their equity research departments. A number of market participants whisper that Goldman might be considering getting out of the busines altogether and focusing on their profitable proprietary trading busines instead.
While we are not sure that such a dramatic rumor is true, we do know that the financial pressures faced by Wall Street research departments are very real and that it would not be surprising if some sell-side firms were undergoing this kind of soul searching.