Sometimes things turn out differently than you expect, and this often applies to financial market regulation. A good example is the topic of equity research, which the EU Commission tackled a few years ago when amending the Markets in Financial Instruments Directive (Mifid II) with an eye on investor protection. With the set of rules that came into force in 2018 after lengthy consultations, the regulators wanted to kill two birds with one stone. On the one hand, the costs assciated with investment products were to be reduced. And at the same time, banks and other financial service providers were to be stopped from pushing equity investments onto the market via research driven by sales channels.

This was to be achieved by prohibiting the costs of research and other services from being passed on to buyers of fund units as hidden costs. Transparency was the new mantra. Asset managers would pay for research and other services. According to the regulators, this would not only benefit consumers, but also issuers in the long term. Independent research would also give smaller companies, which do not have banks with a strong sales force behind them, better access to the markets.

So much for the theory. But a good half decade later, the reality looks different. First of all, the small, independent research firms disappeared from the market. They had sprung up like mushrooms in the years of the stock market boom around the turn of the millennium, to meet the growing demand for investment information.

Firms such as Mainfirst and Equinet disappeared. They were the first to be affected by cutbacks as asset managers began to scrutinise their own cost structures in the wake of the new rules of the game. With fewer and fewer customers, the small firms found it increasingly difficult to cover their costs.

They were bought up by providers who, like the US investment bank Stifel or Pareto, were aiming to build up pan-European platforms. The addition of smaller and medium-sized issuers from Germany and other European markets to the coverage of these platforms was definitely desirable. German SMEs in particular are regarded as the backbone of the economy, and second-line stocks promised above-average return potential in the long years of low and negative interest rates.

Then the major restructuring programmes of the two largest German commercial banks began — and the job cuts did not stop when it came to their research departments. Deutsche Bank and Commerzbank chose different paths. Although Deutsche Bank closed down its comparatively low-margin equity trading business, in which it was only one provider among many, it still maintains not only extensive economic research, but also employs analysts who deal with equity research.

In 2021 the smaller Commerzbank decided to withdraw not only from equity trading, but also from research. In order to still be able to offer these services at the request of customers, the bank entered into a cooperation agreement with the Franco-German bank Oddo BHF. The securities firm offered around a dozen of the 80 Commerzbank analysts a new home.

Raiffeisen Bank International (RBI), ABN Amro, BBVA and Natixis followed the same path. This makes it clear that the exodus of equity research is not a purely German phenomenon. Because there is no money to be made from pure equity research, and cross-subsidisation by asset managers is no longer permitted, other business models had to be found.

Oddo BHF is trying to offer equity research as an additional service to its equity sales platform. Here, too, the margins are slim, which is why the bank is dependent on finding cooperation partners. But the large number of customers is what makes it work. Oddo BHF currently still maintains a team of around 70 analysts covering European equities.

According to market participants, the historic turnaround in interest rates, which suddenly brought other asset classes back into focus, created additional pressure. Not to mention the triumph of passively managed products, which leave the selection process to the market-driven share indices.

Fundamental research on small and medium-sized companies is a real luxury item in such an environment. It becomes affordable only for the big names, whether for image reasons, or in order to gain a foothold in IPOs and other placements.

This consideration is also behind the joint venture that Société Générale recently founded with AllianceBernstein. In order to stand up to the tough competition from the financially strong US banks, the French are relying on transatlantic cooperation. The research giant, which will operate under the name Bernstein, will be headed by Robert van Brugge. He currently heads the research unit of AllianceBernstein, while his deputy Stephane Loiseau is head of the French company's cash equities business.

Société Générale intends to become the sole owner of the transatlantic giant in 2029. With around 750 employees, Bernstein aims to offer coverage of around 1,000 stocks worldwide. You can bet that not too many of these will be smaller companies.