These independent research businesses seek to help advisors assure their clients that they have accounted for every possible bad thing that can happen to their plans, according to John Grace, an advisor in Westlake Village, Calif., and the president of his own firm, Investors Advantage.
Many don‚t believe that new regulations will ensure objective advice from Wall Street‚s sell-side institutions. "We need unbiased buy-side research and, despite all that has happened, I don‚t believe that Wall Street can provide that," declares Rick Kaplan, a chartered financial analyst and Birkofer‚s partner.
Kaplan describes himself as a value manager who has his own in-house investment model. Using independent research gives him a chance to test many of his assumptions, Kaplan says. He also argues that many advisors need outside research because they don‚t have the in-house modeling capabilities.
Many advisors agree with Birkofer, Kaplan and Grace. They say that they have an interest in the growth of this relatively new business. Some are beginning to use it as more research firms become available. Nevertheless, independents face regulatory and historical hurdles, officials of these research firms complain.
"I don‚t know that advisors or retail investors are ready to pay for independent research. I‚m not sure that they see it as something valuable," worries Peter Sidoti, chief executive officer of the Sidoti & Company LLC, a research firm in New York.
The problem, Sidoti adds, is that many people view research as a commodity. He says investors often think they can easily obtain research from the Internet. Therefore, Sidoti asks, how can their advisors persuade them to pay for something that they believe is free?
The growth of the independent research movement comes at a time when Morningstar, for years a big player in rating mutual funds, is now expanding its ratings of individual stocks. Given its expertise in funds and its huge data bank, the Chicago-based Morningstar, which is in the process of going public, is expected to be a big player as the independent research business expands. A spokeswoman for Morningstar declined to comment, saying the company could not comment because its IPO is before the public.
The 75-member Investorside Research Association is a trade group representing new independent research businesses. Investorside officials estimate that there are now some 200 independents offering research services. For the near future, Investorside is not concentrating on attracting new members, but on helping current ones with what they say is a sometimes-hostile regulatory climate.
"Regulators, for years, have taken a one-size-fits-all approach to research," says Investorside Chairman Scott Cleland. But independents now are benefiting from last year‚s global settlement, which requires Wall Street‚s biggest firms to ante up some $1.5 billion to help fund the independents. The payment was, in part, a penalty for the large firms‚ conflicts of interest.
The regulators contended that "from approximately mid-1999 through mid-2001 or later, all of the firms engaged in acts or practices that created or maintained inappropriate influence by investment banking over research analysts, thereby imposing conflicts of interests on research analysts that the firms failed to manage in an adequate or appropriate manner," according to the Securities and Exchange Commission settlement.
Some of the firms cited and forced to pony up were Credit Suisse First Boston, Merrill Lynch, Goldman Sachs, Bear Stearns and Piper Jaffray, among others. Nevertheless, despite some $430 million of the settlement money going to fund independent research businesses, Investorside officials say independents still have many hurdles ahead of them.