Companies are complicated. Investment is tricky. Predictions are hard to make,
especially about the future. What’s needed are
local guides who try to point investors
in the right direction. We have them in the form
of securities analysts. These professionals typically
work for brokers, investment banks, and fund managers. They do statistical analysis
and talk to company bosses. Recently, they seem to
have been in retreat. What’s gone wrong for them? First, regulation
has tightened up. Customers have decided
fewer analysts are needed. Second, investment is changing. Customers, who are mostly active
managers, are in retreat too. Third, the focus of big
business is shifting. Companies are beginning
to see a purpose broader than shareholder value. Many analysts
specialise in valuations based on next year’s profits. That’s an important
skill, but a narrow one. Are securities analysts doomed? Are analysts now as obsolete
as diesel cars or cassette players? Let’s consider each challenge. The regulatory hit comes
from Mifid II in the EU. Commentators have likened
it to the triffid, a fictional man-eating plant. Before Mifid II, fund
managers routed their trades to a broker to
execute on the market. In return, brokers
charged commissions that included the
cost of research received by the fund manager. Mifid II required fund
managers to disclose this cost to their clients. Embarrassed, they decided
they needed less of it. The trend is spilling
over into the US. Other changes are thinning the
ranks of securities analysts. Index funds, which passively
track market benchmarks, are growing fast. PwC forecasts index funds will
account for half the US total by 2025. But Lex thinks reports of
the death of the securities analysts are exaggerated. Here’s why. Analysts blind to
societal change are as doomed as any
other professionals. Those who adapt are not. They can calculate discounts
on oil and gas reserves due to climate
change, for example. Index funds have made smaller
inroads than worriers imagined. And their share of the US stock
market is only 13 per cent. Moreover, part of the
justification for index funds is misleading. They are certainly
low cost and may appear to remove human error. But in reality, index compilers
can still make bad choices. They could trap
investors in weak sectors during downturns when it could
increase financial instability. Finally, people will
always need other people to study the numbers
behind investment. UK and US brokers may
require fewer analysts. Other employers may want more. Data from the CFA Institute show
demand to take its tough exams is rising sharply in Asia
and is steady elsewhere. The securities analysts is dead. Long live the
securities analyst.

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