The head of JPMorgan’s nearly $2 trillion funds business issued a stark warning for a large group of Wall Streeters (JPM)

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  • Mary Erdoes, the head of JPMorgan Chase’s $1.9 trillion asset and wealth management business, painted a bleak future for many Wall Street stock analysts at a conference Thursday.
  • Asset managers like JPMorgan are expected to slash research budgets by as much as 50% in response to European regulatory reform known as MiFID II.
  • That means money to pay analysts will shrink, leaving only top-tier talent with a higher standard of excellence.
  • “I was dealing with 10 of you; I don’t want 10 of you anymore, I only want the five best of you,” Erdoes said. 

 

Wall Street stock analysts are about to find themselves on the chopping block, and only the best will survive. 

That was the hard truth Mary Erdoes had for a room full of analysts Thursday at the BancAnalysts Association of Boston Conference.

Erdoes, the head of JPMorgan Chase‘s $1.9 trillion asset and wealth management business, was asked about impacts from MiFID II — Europe’s sweeping financial regulatory changes that will be implemented in 2018 — and painted a future in which asset mangers chop their budgets and only pay for research from top-tier analysts.

“On the buy side, the larger firms will absorb the costs and figure out how that cascades its way through,” Erdoes said. “It probably means they’ll tighten up a lot on what they spend on sell-side research, which is why the two go hand in hand.”

Firms are planning to make cuts because MiFID II requires asset managers pay for research separately from commissions for trading execution, whereas it previously often came bundled with other products. 

Most of the largest asset managers, including JPMorgan, are absorbing the multi-million dollar costs and funding the research internally, rather than passing the costs on to their customers.

“I only want the five best of you.”

This is bad news for stock analysts, as it could result in a 50% “compression” in research budgets, according to Credit Suisse. That means less money to go around.

Erdoes plainly laid out what happens next: “I was dealing with 10 of you; I don’t want 10 of you anymore, I only want the five best of you.”

She noted that the sell-side research industry had already contracted massively in recent years, with investment banks spending “50% of what they used to spend.”

“So you’re the precious few. The rest of them are not here. Maybe this room was five-times bigger before, I don’t know,” Erdoes told the audience of analysts, many of whom would presumably not be there the following year given the looming cuts.

The upside? The research quality will improve as the fat is trimmed. 

“It’ll just make the industry better,” Erdoes said. “It will constantly get you to excellence and get rid of the less than excellence.”

That’s the cold hard truth sell-side stock analysts are facing: If you’re not in the top-tier, the Mary Erdoes’s of the world won’t have much use for you anymore. 

Some who get edged out, however, will likely find work within buy-side asset managers, she added. 

Erdoes also anticipates the number of sell-side research providers will shrink, as the smaller firms will have to price competitively with the larger firms while still paying for top talent. 

“It’s going to be very difficult for the the bespoke, research-driven firms to be able to do that on the sell side,” Erdoes said.

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