New research businesses bloom.
The independent research business, buoyed by a recent settlement that provided it with tens of millions of dollars, is hoping the advisor community will see it as a new source of unbiased information.
But will it? And will the independent research houses, most of which have been in business for a relatively short period, survive and establish credibility with advisors?
Those are the questions facing the reborn research industry. Some advisors believe they have a stake in these firms surviving. They say that advisors need to turn to them for unbiased research because they lack the in-house modeling capabilities required for sophisticated portfolios and for analysis of alternative investments that clients increasingly request.
A handful of firms led by Standard & Poor's, Value Line and, more recently, Morningstar and Argus Research, have traditionally dominated the independent research business. They, along with the newer upstarts, are believed to generate over $500 million in annual revenues, with the larger firms controlling the lion's share of the total.
Given the widespread discrediting of Wall Street research, some think independent research could experience a wave of continued growth. "We are also using it (independent research) to challenge or validate research that we have already done in-house," says Joe Birkofer, a certified financial planner and a principal of Legal Asset Management in Houston. Birkofer says his firm, which works with high-net-worth individuals, runs value portfolios. The research provided by independents is important, he explains.
"We're seeing independent research firms shifting their focus from the buy side to the sell side," said John Meserve, president of BNY Jaywalk, an independent equity research consultancy. He said that the independents, which have generally concentrated on institutional business, are starting to reorient services toward retail institutions, including individual investors and financial planners.
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.