It strikes me as profoundly melancholic to think about the dwindling ranks of financial analysts in the City of London. I remember a time, not so long ago in the grand scheme of things, when the Extel awards lunch was the "City's Oscars" – a grand affair where the best in the business were lauded. Now, that tradition has morphed into a black-tie dinner, a subtle but significant shift that, in my opinion, reflects a broader change in the industry's landscape.
The Vanishing Act of Small-Cap Analysts
What really caught my eye was the stark decline in UK Small & Mid-Cap (SMID) brokers' rankings. This isn't just a statistical blip; it's a symptom of a much larger ailment that has plagued this vital segment of the market. The introduction of MiFID II in 2018, with its mandate to unbundle research costs from broking commissions, was, as Extel's CEO David Enticknap put it, "not a fatal, but certainly a painful, blow" to equity research. Personally, I believe this regulation, while well-intentioned in its pursuit of transparency, inadvertently choked off the lifeblood for many smaller research teams.
The numbers are sobering: a drop from 29 small and mid-cap retail analysts in 2007 to a mere 17 today. The support services sector has seen a similar contraction. It's a stark reminder of how regulatory shifts, even those aimed at improving market function, can have unforeseen and devastating consequences for specialized expertise. The names of firms that once graced the Extel rankings – Bridgewell Securities, Oriel Securities, Cenkos Securities, Seymour Pierce – are now mere footnotes in financial history. This consolidation, with giants like Deutsche Bank acquiring Numis Securities and Panmure Gordon merging, signals a hollowing out of the independent research landscape.
The Erosion of Sector Coverage
Beyond the sheer number of analysts, the shrinking breadth of sector coverage is equally concerning. In 2007, the UK SMID survey covered 18 distinct sectors. Today, that number has plummeted to just nine, with entire areas like Chemicals, Metals & Mining, and Transport & Logistics vanishing from the radar. From my perspective, this loss of specialized coverage means that smaller companies in these neglected sectors are likely flying blind, struggling to get the attention and analysis they need to thrive. It creates an information asymmetry that can't be good for market efficiency or for the companies themselves.
A Glimmer of Hope, But Is It Enough?
There are, however, whispers of recovery. The Investment Research Review in 2023 and subsequent rule adjustments by the Financial Conduct Authority, allowing some bundling of research and trade execution payments, offer a ray of hope. Enticknap's observation that "the seeds are there" and that "research has to be valued" by the buy-side is crucial. If research is truly appreciated, liquidity, he argues, will follow. This is a critical point; the value of insightful analysis needs to be recognized and compensated, otherwise, the talent will inevitably be drawn elsewhere.
The Challenge of Attracting Young Talent
But the biggest hurdle, in my opinion, is attracting the next generation. Back in 1996, Alistair Darling, then a shadow chancellor, noted that a good Extel ranking could significantly boost an analyst's salary. Today, with the allure of tech and its promise of rapid wealth, the City faces a stiff challenge. Persuading bright young minds that a career as a broker's analyst is not just a job, but a "noble calling" vital to the health of the London market, will be the ultimate test. If we can't rekindle that passion and perceived value, the City's analytical prowess may continue its slow, silent vanishing act.
