New York Attorney General Eliot Spitzer’s Global Settlement and former SEC Chairman Arthur Levitt’s Regulation Fair Disclosure have changed the way Wall Street research is performed. A panel sponsored by the New York Society of Security Analysts reviewed these changes and who is poised to take advantage of the altered equity research business.
The panel agreed that the Global Settlement’s attempt to finance independent research is aimed at retail investors and will likely fund research on widely held stocks that already receive coverage elsewhere. John M. Eade, president of Argus Research Corporation, expressed the opinion that government action alone won’t create un-biased research and proceeded to promote an association of independent research firms called the Investorside Research Organization.
Andrew Klein, founder and chairman of Soleil Securities Group explored the process in which the financial community uses independent research. A salesman representing the research producer calls asset managers early each morning and tries to give them investment ideas. Each quarter, asset managers and others in their organization get together. They discuss which research has been accurate and valuable and then decide what research they will buy in the future. Klein believes this approach discourages a subscription research business model.
Jack Rivkin, chief investment officer of Neuberger Berman, agreed that there will be a greater emphasis on quality research as large investment banks and financial institutions reduce their research departments. Rivkin also believes that the use of “soft-dollars” hasn’t been eliminated by division between research and investment banking meant to remove conflicts of interest. Instead, it has made more difficult to get money for providing ideas that result in trades. Another result of the split between research and investment banking is the reduction of the number of stocks covered by an analyst.
Jonathan Glick believes that analysts don’t need ideas and rather just want facts to support their own ideas. His company, the Gerson Lehrman Group, uses a business model that connects organizations with experts on a broad range of subjects. The use of research to validate existing ideas is also prevalent in the field of competitive intelligence, according to Benjamin Gilad, President of the Academy of Competitive Intelligence.
The other major change in the industry is that sell-side analysts are much less likely to support investor relations executives. This has resulted in less coverage of stocks. This also means there are opportunities to help companies raise money, support a share’s price and convince Wall Street that the company will do well. This is where independent analysis comes into play. Independent research firms can be paid to create logical arguments to sell a stock.