In case you haven’t seen it yet, this week’s blog post is a reference to “Straight Outta Compton”, a movie that chronicles the story of 90s rap group NWA. It got me thinking that Wall Street analysts are similar in many ways to the members of NWA – highly talented individuals tarred with a reputation for criminality. Like NWA, their heyday was the 90s, and many of them have since moved on to other (more legit) pursuits. It also got me thinking that these ex-Analysts represent an enormous pool of latent talent, and harnessing that talent in the right way has the potential to create something very powerful.
- The Decline of the Wall Street Analyst
I’m always surprised when a college student tells me they want to be a Wall Street analyst. This was a job that was cool in the 90s – you got paid a lot of money and you were treated like a superstar. Your name became synonymous with the latest hot Internet stock and everyone wanted to be your friend. The reality for a young analyst now is very different.
Over the last 20 years there has been a huge downsizing in the Wall Street machine, most of which has happened in the last 5 years. According to Frost Consulting, global sell-side budgets have fallen from a peak of $8.2bn in 2007 to $4.8bn in 2013. Edison Research estimate that the average number of analysts globally has fallen from 18,000 in 2007 to 9,000 in 2012. That’s a lot of analysts leaving the industry. Not only has the number of analysts declined, but the average quality of analysts has also decreased
“At many investment banks a response to the decline in revenues has been to replace experienced but expensive senior analysts with junior and therefore cheaper analysts. The data does not capture the generational and experiential loss” The Future of Equity Research, Edison Research
What’s more, the decline is expected to continue. A Survey from the CFA society in 2013 asked this question to 350 CFA members: “Within the next few years, what do you think will have happened to sell-side research numbers?” 73% of those surveyed believed there would be a decrease versus just 3.6% believing there would be an increase.
- Where do ex-Wall Street brokers go?
9,000 analysts is a lot of talent to disappear from Wall Street. You might ask what happened to all these analysts? What are they doing now? The answer to to this is not straightforward since there is no typical “career path” following a departure from Wall Street. Much of what we know is pieced together from anecdotal evidence.
My experience is that many of them go into semi-retirement. Especially those who were lucky enough to have worked over the late 90s and built up a big nest egg (assuming they didn’t blow it all of course). They like to keep their hand in with a couple of non-executive positions and maybe some consulting. But for the most part they’re happy to see the back of the 80-hour work week.
Others go onto adjacent careers within Wall Street (Investment banking, Private Equity or VC). Some may start up a business of their own or set up a consultancy. It’s interesting in this context to look at where some of the 90s superstar analyst ended up. Just like the members of NWA, they went on to do some quite diverse things:
Henry Blodget (the Ice Cube of Wall Street?), kept himself busy with writing/ broadcasting and is now the CEO and Editor of the Business Insider.
Mary Meeker, known in the 90s as the “Queen of the Net”, is now a partner at a Silicon Valley VC firm
Jack Grubman went on the found his own consulting firm specializing in technology and telecoms.
- Harnessing the Talent
The combined knowledge of these Wall Street analysts is huge. Many of them have 2 decades or more of experience studying one sector and the companies in it. Multiply that across c. 9000 analysts and you have a powerful workforce. Sure, their research was riddled with conflicts of interest and the analysts were overpaid. But much of that was a product of the warped incentives created by the sell-side. Strip that away, you’re left with a group of incredibly smart people with a huge pool of accumulated knowledge. In short they are not bad people, but they picked up bad habits from too much time on “The Street”.
The Wall Street model is crumbling, but that doesn’t mean that equity research is broken. Far from it – the need for research is greater than ever as active managers look for ways to generate outperformance with limited resource. But we do need a new model that promotes transparency and is free from conflicts of interest. Part of our mission here at StockViews is to create a platform that can harness the talent of these Wall Street analysts in a positive way. I’ve spoken to many ex-Analysts in the past few months who would love nothing more than to get back into research – but to do so on their own terms. If you’re an ex-analyst and this resonates with you, we’d love to hear from you!
“Crisis is the most reliable agent of change. Out of these difficult industrial transitions, opportunity is created for those participants that are still engaged and have the ability to adjust their business models. The decline in investment banking research budgets finally reduces capacity in a market that has been over-saturated, probably for decades. This increases the ability of the remaining players to differentiate themselves and seize market share” Frost Consulting