Only 44 new independent research houses started in 2010, the lowest level of start-ups since the early 1990s, according to Integrity Research, a firm that follows research industry trends on behalf of buy-side clients.
‘We are in a new era,’ writes Sanford Bragg, CEO of Integrity Research, in a note to clients issued this morning. ‘A decade ago, being independent from investment banks was a positive in the eyes of regulators and investors. Now independents are viewed as unregulated entities that generate risk.’
Singling out the taint caused by Primary Global, the expert network provider caught up in recent insider trading scandals, is too simplistic an explanation for the fading luster of independent research, Bragg says: ‘The causes are much deeper and they aren’t going away.’
The heyday for independent research was 2003 when a record 112 new firms started up following the Global Research Analyst Settlement. ‘Many senior analysts left investment banks, some going to the buy side, some to independents’, notes Bragg. They were lured by the $90 mn a year for five years that a dozen investment banks were forced to spend on independent research.
While institutional investors were open to independents and ‘hedge funds in particular developed an appetite for niche boutiques whose research was not widely disseminated’, Bragg says the regulatory push for transparency and commission disclosure guidelines had waned by 2006. By the time Lehman Brothers went bankrupt in late 2008, ‘the nails were in the coffin of equity research reform.’
‘Most of the independent research industry grew up in an environment where conflict management was the regulatory topic du jour,’ Bragg adds. ‘We now live in an environment where it is all about information control. The regulatory goal posts have shifted.’
In a telephone interview, Bragg also acknowledges that the shrinking commission pool has pressured the economics of research for all providers. ‘Often the asset manager will tell the research provider, I can’t pay you as much as last year,’ he notes, adding that it’s particularly difficult for stock pickers to do well in the current volatile market, and basket trades in ETFs are capturing more of asset managers’ equity exposure.
The independents that are still doing well are either providing a big picture perspective or policy analysis. ‘It’s a macro market and what’s going on in Washington is very important to investors,’ Bragg concludes.
[Article by Brad Allen, Inside Investor Relations]
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