By Cydney Posner
Reuters is reporting that independent analyst research, once "all the rage on Wall Street," is not faring well in the current economy.
The vogue for independent research began in 2003 after a $1.4 billion Global Settlement between Wall Street banks and regulators over allegedly tainted research that was provided to clients during the dot-com boom. (See my email of 4/28/03. In addition to monetary penalties, the Settlement imposed a number of requirements aimed at reforming the industry, including obligating the firms to furnish their clients with independent research from at least three independent research firms for a five-year period. Each firm was required to retain an independent research monitor, who would consult with and report to the regulators, to oversee the process to insure the research was independent, of high quality and useful to the firms' various customer bases. ) According to the article, "[t]he settlement forced Wall Street banks to restructure their research departments. Banks could no longer pay analysts more for winning investment banking revenue, so analysts' pay dropped. Many responded by leaving banks and setting up their own independent research firms. Investors, after learning more tawdry details about how banks' investment research was made, grew increasingly willing to work with independent analysts." According to an industry analyst cited in the article, "'It was like a big gold rush when everybody wanted to be an independent research provider,... But all the hoopla around independent research in 2003-2004 has died down."
Now, smaller research houses are having a difficult time surviving "in a market where everyone from the big Wall Street banks to major mutual fund firms are seeking to cut costs. [The closing of research units] is also a sign that major investors may no longer be prepared to pay for a diversity of opinion about the markets." Once the five years elapsed and the requirement disappeared, "independent firms had less revenue to rely on. Spending on such research will be down 24 percent this year compared with 2008, according to Integrity Research."
Eliot Spitzer, NY AG at the time of the Settlement, "compared the independent research industry's current dilemma with that of media companies battling against free news articles on the web. ‘People want the content, they don't want to pay for it,' he said in a recent interview with Reuters."