The End of the Brokerage Analyst

Bloomberg recently ran an interesting piece on the gradual decline of sell-side analysts. Much like how media companies such as newspapers used to maximize profits by bundling complex, hard-to-price products, investment banks have long made money in a similar way.

In the 1990s, the primary role of analysts was to generate investment banking (IB) fees through M&A and IPO advisory — essentially sales — which inevitably created conflicts of interest. That hasn’t changed much even today. For funds that pay high fees, arranging meetings with the management of target companies has become a key part of an analyst’s job, and this creates a powerful incentive to maintain buy ratings on certain stocks.

In the US, analyst salaries remain roughly 30% below pre-2008 financial crisis levels. In Korea, there was a time when top-ranked analysts earned as much as 500 million won a year, but now it is said to be closer to 200 million. Prices have risen due to inflation, yet even nominal wages have fallen.

In the past, it’s quite possible that the volume of investment research distributed to the market was excessively high. Now we are seeing a more balanced picture. Rather than paying for research that everyone can easily access, it is increasingly viewed as more rational to use internally generated information to monetize directly through trading.

In other words, if an analyst is truly skilled, running a fund directly is far more lucrative than selling research reports through various channels. In practice, leading US hedge funds no longer rely on brokerage (sell-side) analyst reports; instead, they hire their own fundamental analysts. Because of restructuring, each sell-side analyst now covers more companies, making it harder to conduct in-depth analysis as in the past, and this is compounded by the conflicts of interest mentioned earlier. This is also why AWARE, with its strength in fundamental equity research, has chosen a hedge fund as its next business model.

Over roughly one year and seven months, AWARE’s model portfolio has delivered a total return of 109.3%, outperforming the S&P 500 by 71.7%, which demonstrates the strength of our fundamental research capabilities.