Is the brain drain over? New research shows reversal of broker juniorisation trend

Brokers are once more ‘paying to play’ when it comes to analyst spend – an indication that human judgement and senior experience are preferred over artificial intelligence (AI).

Involving 45 asset managers across Europe, the UK and North America, with combined assets under management (AUM) of more than US$16 trillion, a new survey from Substantive Research – a market data discovery and spend analytics provider – highlights the influence that research spend has on market positioning for the world’s biggest investment banks and brokers.

The data shows the juniorisation trend in research analyst headcount is now clearly in reverse, with 1,400 years of experience returning to the top 30 brokers from niche providers, the corporate sector and the buy side. In comparison to the ‘brain drain’ between 2018 and 2021, which saw more than 7,500 years of net experience leave the industry, only a handful of firms reported juniorising their teams in 2024.

“The brain drain has halted,” confirms Substantive Research CEO Mike Carrodus, speaking to Euromoney. “Some firms are obviously more aggressive than that than others, but the vast majority of the market has seniorised their teams.”

According to Substantive’s report: “Brokers are looking for targeted, experienced hires in a market which has ‘turned the corner’, but has stabilised at a much lower base post-Mifid II.” Mid-tier brokers are also beginning to hire and “seniorise” certain teams where they feel they have comparative advantage or where they see new opportunity. 

Investment in new talent is now seen as an important means by which to increase market share in a market driven by consumption of analyst and corporate access meetings. 

In terms of rankings, JPMorgan continues to top the list in market share as well as analyst interactions, but when it comes to headcount, it has only grown its team modestly when compared with the peer group. Despite JPMorgan’s much-publicised low rates for access to written research post-Mifid II, the firm dominates the market for analyst and corporate direct access, where the majority of each budget is allocated.  

Jefferies has risen to second place in terms of research payments and is top in terms of net headcount increases this year. It was still able to make these market share gains, despite being only seventh in terms of driving client meetings with its sector analysts – this is a significant result in a market where the number of analyst meetings traditionally drives much of the remuneration calculations.

The move into second place represents a notable advancement for Jefferies. In Substantive Research’s 2023 study into the investment research market, JPMorgan and Morgan Stanley held the top two positions in market share, with Jefferies in third place overall.

At that time, market share gains were a direct result of investing in hiring and retaining skilled research analysts, against a backdrop of post-Mifid II price deflation and a move towards juniorisation of research. 

But the investment research industry has witnessed substantial changes in the past year. A particular area of development was that payment optionality is now available to all asset managers in the UK, updating the Mifid II rules mandating that research costs had to be ‘unbundled’ from execution costs.  The new payment optionality means that, in theory, asset managers will once again be able to pass research costs back on to the end investors – essentially, a joint payment model.

Looking at firms involved in the survey, 80% of research is still paid for through profit and loss (P&L), with 13% joint-funded and just 7% client-funded. This could shift in the near term, but, for now, the majority of the market remains hesitant, waiting to see how asset owners take the changes and which method is employed by the largest firms.

Carrodus warns that despite the positive news around broker research spend, the changing climate means firms should remain cautious.

“The question is the sustainability of this move, given the complicated outlook for fundamental change in the size of research budgets, post any regulatory softening,” he explains. “What remains to be seen is how much of this renewed hiring is a natural stabilisation from previous years, and how much is due to optimism around the recent efforts by the UK and the EU regulators to help reflate research supply and coverage.”

Both sets of regulators are now making it easier for asset managers to return to charging their end-investor clients for these multi-million-dollar research budgets. However, the buy side is in ‘wait and see’ mode as it assesses the potential risks of making this move.

“Right now, there are some adversarial conversations going on between the bulge-bracket banks and some of the largest asset managers in the world about their research wallet and payments,” says Carrodus. “The regulatory softening is making a lot of people think that a significant portion of the market moving to client-funded research budgets is inevitable. What we are seeing unfold is a journey that is more complex and more protracted than maybe some on the sell side were hoping. The question now is how that budget is going to unfold.”

So how can providers evolve to take advantage of any flexibility? One way could be to double down on the alignment between increased research spend and a more leveraged performance – highlighting to the buy side that shared payments would be in the best interest of the end-investor. But that journey will be nuanced and slow, requiring the industry to reach a comfort level before it can source a new budget for research.

That’s a multi-year journey, and may involve research providers having to improve and evolve their product to thrive in a joint-payments landscape – for example, by generating new formats for research, new ways of delivering underlying data, creating structured content from unstructured content, and so on.

Commitment to – and investment in – this journey has the potential to create a real competitive advantage in this changing financial and regulatory landscape. Firms such as Jefferies have done so, and they are now enjoying the fruits of their targeted research strategy, which has pivoted the firm into a position as a valuable counterparty for their buy-side partners.

“Over the past four years, Jefferies’ equity research headcount has grown globally by 34%, as we have made dozens of senior hires across Europe, the Americas and Asia,” Alex Coffey, head of EMEA equity research, tells Euromoney. “We aim to provide our clients with actionable ideas, insights and analysis that only experienced talent can offer, and we continue to invest wherever we see opportunities.”

But other firms may not take such a long-term view, and it is here that the danger might lie – the suitcase banking trap, where firms hire and fire based on short-term market fluctuations rather than long-term organic strategy.

The immediate risk is that the regulatory softening, seen in the FCA’s payment optionality and the EU’s Listing Act, does not translate to the increased pricing and higher research budgets that 2024 hiring trends could be relying on.

“While a move from asset managers in Europe to charging their end-investors once again won’t guarantee a rise in research pricing, many brokers hope that the buy side does make the transition in 2025, and budgets become more flexible once again,” explains Carrodus. “Brokers at the top of research provider lists with the accompanying market share and resources can be patient while this all plays out. Those further down who are investing will no doubt have a sharp focus on which way the buy side decides to go in 2025.”

What should brokers be doing to ensure they capture this opportunity?

“It's about creating new products, adding new value, investing the money into your research team so that you’re not left behind,” concludes Carrodus. “Brokers need to be putting strategic processes in place now to make sure they are not left behind in that journey towards joint payments.”