The Value of Vetting

We see it in all sectors, professions, and projects: A vetting process for identifying value. Whether it’s the A&R guys who find us the best bands; the headhunters that find us the best executives; or the search engines that finds us the best information – we are a society that has come to value the processes that fast-track us to top results.

We’re learning the same is true for StreetBrains and its vetting process for qualifying the analysts we add to our brand. To give a rough idea, 400+ analysts have been through StreetBrains vetting process in the past 8 months. However, we have only launched 10 of those as brands. Our purpose has always been that we want to represent great insights and analysis, so we’ve been extremely selective in bringing on new brands who offer insights that cannot be found anywhere else. But we’ve learned from several clients recently that the value of our vetting process is actually much bigger than that.

A recent study by the Noble Group – a UK investment bank – found that financial directors of AIM (Alternative Investment Market) listed companies had a very low awareness of independent research.

The findings show:

75% of respondents could not name an independent research company.

58% did not even try to name an independent research company.

17% thought they could name one but named a broker or an information service rather than an independent research company.

Only 24% could name an independent research company.

Part of the problem with even the best of the best independent analysts is that most clients don’t have the time to go out and seek out and assess the quality of every independent researcher they come across. In theory, they like the idea of using independent research…but, where to find them? We’re hearing more and more often that firms find this ‘discovery’ process to be a daunting task.

By bringing a variety of analyst brands onto one platform after a stringent vetting process, StreetBrains is able to cut an enormous amount of ‘vetting’ time out for the client. That client is now able to focus on finding tradable insights, rather than trying to assess credibility, writing style, or brand focus. In essence, we bring the mountain to Mohammed.

The Noble survey also found that 84% of the surveyed AIM financial directors think that broker research is biased.

While this comes as no surprise to us, it underscores the importance of increasing the awareness and visibility of truly independent analysts. (Truly being the operative word…but that’s a topic for another day!)

Bottom line: if the objective insights of independent analysts can be more easily accessed, it seems that their insights would be welcomed by clients who are clamoring for non-biased research.

The End of Pollyanna Propaganda?

It almost pains us to ‘pile-on’ with yet another blow to Wall Street’s favorite punching bags, but let’s be honest, they’ve brought this upon themselves.

In yet another story this week that bullies research analysts about their collective incompetence (to make the distinction, we are referring to the 'mouthpieces' at big firms who are payed to spew rhetoric, not analysts who are independent and conflict-free), Geoff Colvin, writing for Fortune, brought us ‘Analysts in Fantasyland.’ To excerpt from the painfully accurate account delivered in Geoff’s story:

Maybe Wall Street analysts are more honest and less compromised than they were pre-SarbOx, but recent events show that they're still awful at their most important job: predicting bad news. They haven't lost their habit of falling in love with the companies they cover and refusing to face unpleasant realities until everyone else has already done so. Now, eight years after they were inflating the bubble, we again have to question whether analysts do retail investors any good.

The latest evidence: Analysts have only just discovered that corporate profits in the fourth quarter aren't going to be nearly as strong as they had supposed a month or two ago. The consensus view going into the quarter was that S&P 500 profits would go up 12 percent to 15 percent, a large jump coming on top of the 20 percent rise in last year's fourth quarter. In light of the credit crunch, the housing collapse, and the towering price of oil, that forecast seemed highly - one might say insanely -optimistic. This it proved to be, but only after the quarter began did the consensus view finally lurch into the real world. Their growth forecast is now about 1.5 percent and still falling.

It has been obvious for many months that profit growth would have to slow way down simply because it couldn't continue at recent rates. Profits have been rising sharply the past few years, which makes sense after the hole they fell into in 2001 and 2002. But by early this year they had grown to 12 percent of GDP, way above their historical average of 9 percent. Analysts knew all this, and in case they didn't, various commentators (including Fortune's Shawn Tully) were insistently pointing it out. But the analysts, ever hopeful, chose to believe that U.S. companies would perform magic.

Although their hand was somewhat forced, in-house analysts are finally able to call it like they see it (as long as they talk ONLY about what has already occurred/is occurring). Perhaps it’s better late than never? Could the days of Pollyanna Propaganda be over?

We doubt it, but at least they’re not denying the sky is blue….for now.

Wall Street Swarmed With McFlys

For those of you who remember the 80’s classic, ‘Back to the Future’, I’m sure you’ll agree – George McFly is the most spineless character in cinematic history.

Sadly, it seems that McFly has cloned himself a thousand times over, and his spawn have infiltrated Wall Street in the form of research analysts.

In Scott Patterson’s ‘Ahead of the Tape’ column in today’s Wall Street Journal, he pulls the lid off of Wall Street research in his story titled, ‘Analysts Botch Profit Forecasts on Home Turf.’ (click here for full story.)

While the entire article goes on to point out conflict-ridden research coming out of the Street, particularly in the wake of the subprime mess, one quote in particular stuck with us.

Paul Hickey, co-founder of Bespoke Investment Group is quoted in the article, saying, “You often see brokerage companies giving their peer companies the benefit of the doubt, so they don’t get in this shooting match.”

What is it exactly that has stripped Wall Street analysts of their backbone? Fear of being fired? Perhaps. But that exists for all employees, no? Even full out whistleblowers out there in the past 5-10 years have stood up to ‘The Man’ and been rewarded, so the fears of these analysts to issue negative or contrarian reporters seems unfounded. Yet Wall Street analysts seem to cower in their corners, doing as they're told, content to simply keep their heads down, collect their paychecks, and pray they aren’t asked to become a profit center. McFlys.

With only 7% ‘Sell’ ratings on the year, and with all of the Biffs out there pointing the bullying finger in their direction, in-house analysts are going to have a tough go in ’08. Independent analysts have a tremendous opportunity to make inroads with players on the prowl for valuable research.

Appropriately, here’s the dialogue from a scene between Biff (the bully) and McFly (the spineless wuss):

Biff Tannen: And uh, where's my reports?

George McFly: Uh, well, I haven't finished those up yet, but you know I... I figured since they weren't due till...

Biff Tannen: Hello? Hello? Anybody home? Huh? Think, McFly. Think! I gotta have time to get 'em retyped. Do you realize what would happen if I hand in my reports in your handwriting? I'll get fired. You wouldn't want that to happen, would ya? Would ya?
George McFly: Of course not, Biff. I wouldn't want that to happen. Now, look. I'll finish those reports on up tonight and I'll run 'em on over first thing tomorrow. All right?

We Called It

As previously mentioned, every couple of weeks we will be highlighting some of the big calls made by StreetBrains’ portfolio of independent analysts.

Remember: StreetBrains provides conflict-free research – the analysts do not hold positions in the stocks they cover, and are not affiliated to any investment banking outfits. Period.

Below are some of our calls:

• Boo-hoo, Mickey - PatternWatch put the squeeze on Walt Disney (DIS) this past Friday, when they pointed to technicals and fundamentals that supported shorting this stock. Click here to read ‘Mouse Trapped’ by Carrie Coolidge from the 12.24.07 issue of Forbes, now on newsstands.

• Known best for great pairing ideas, Gotham Research recently was up 15% on a Bob Evans (BOBE) (long) / Brinker (EAT) (short) pairing. They worked their magic again when they closed out up 11% on a Commerce Bancorp (CBH)/Bancolumbia (CIB) play last week.

• Photizo Group continues to cultivate their contrarian calls by putting a BUY rating on Xerox (XRX) this past week.

• Coming from very different sector perspectives, both Sterling Account and inMotion issued BUY ratings on Schlumberger (SLB) recently. Perhaps they’re on to something….

Fund Fees: What are you paying for?

It’s probably safe to say that anyone with money to put into a hedge fund doesn’t mind paying a high percentage management fee as long as you’re getting a phenomenal return. It all comes down to value.

Same goes for Manhattan real estate – if a broker shows you your dream townhouse, but you have to pay a 20% broker fee, you wouldn’t blink. You’d be ecstatic that you could stop sifting through all of the unsuitable apartments, and the value of finding what you’re looking for would justify the expense attached to finding it.

In both of these scenarios, the ends justify the means. Unfortunately, for less risky investments, the returns are not high enough to eliminate the question:

What are you paying for?

In the case of mutual funds and pension funds, which, by design, are not typically risky investments, of course the rewards are not usually as exponential as might come from a hedge fund investment. Yet, they have more hidden fees attached to them than Paris has boy-toys. The lack of transparency in fund administrator services and 12b-1 fees as well as management fees, loads, expense ratios, turnover rate, taxes…goes on and on.

(Is your head spinning yet?)

The unbundling initiative that is being largely lead by the independent investment research world would likely help alleviate some of these incurred costs, while also putting money back in the pocket of the Portfolio Managers (PM).

Say what?

That’s right. The guy making you money, should make good money. No one disagrees with that statement. His management fee – if he’s made you 30% this year - is a non-issue. The part that should be called to question is – what other fees are you paying that are unjustified, or being billed to you for unused or under utilized resources?

Like that $150 gym membership you pay each month to have access to something you don’t use – at some point it’s time to reassess the fees you pay and ask: What exactly am I paying for?

Bundled research – the research provided as an ‘add on’ to execution - falls into that camp. This research is often redundant, lacking of value, and gets as much use as your dormant gym membership. Yet it continues to be purchased because it is as common practice in the industry.

Part of the reason this cycle has yet to be broken is that PMs fear unbundling would create more work for them. Though it may take some work on the front end to seek out the top providers for execution and research, respectively – the pay off on the back end of having insightful, actionable research on one hand, and best execution on the other would alleviate headaches for both PMs as well as investors.

The clock is already ticking for PMs to jump on the unbundling bandwagon. Regulators are taking a look at how unbundling can help paint a much clearer picture of incurred fund fees and now it’s only a matter of time before requirements are enacted here in the US as they have been in the UK.

Unbundling could potentially revolutionize the way that funds do business, and bring in some serious revenue for those who embrace it. In a business where being late to the game can cost you everything, we think we will continue to see firms jump on board the unbundling bandwagon.

DeCommoditizing Investment Research

In the brilliant book, Mavericks at Work (a must read) – there’s a great quote from Vernon Hill at Commerce Bank who says:

“We’ve shown that you can decommoditize a commodity business. Nobody needs another me-too bank.”

The notion of decommoditization is one that the investment research world should take to heart. The lack of insight and value in most investment research has become appalling. When the biggest difference to be found in ten research reports is a 2 cent discrepancy in target price, it’s safe to say that research has become a commodity. But how can analysts change the playing field?

Realistically, it’s not easy for in-house analysts. They are all talking to the same sources as their competitors and learning the same information at the same time (thanks to SarbOx, RegFD and other regs). They all have a mandate to cover specific companies, and truthfully – they really aren’t there to be creative and see/analyze outside of the box. This is a necessary tool, and not one to be undervalued. But is it necessary for firms to have this research from more than one source?

The answer, of course, is no. But big firms – for CYA reasons – need to have in-house analysts dedicated to the companies that their firm invests in. Makes sense. They can’t rely on outside analysts for that. But why would they pay another firm to receive the same research they produce in-house?

Right now, it’s simply because in most cases, they get the research ‘for free.’
(READ: they get it for 3 cents a share as a tack on to their execution pricing.) So why pay for MORE research in addition to that research?

Many firms are starting to understand why. They’re asking themselves what the value is in the commoditized research they currently pay for through their execution, and they’re recognizing how little new information they are accessing. This is leading to a trend in unbundling for some in the industry. It’s possible that decommoditization has already begun. But can it continue?

We believe it can. The feedback StreetBrains gets from clients is that straight forward research is important, but so is insightful, objective analysis. Value is the name of the game – and if indie research providers can step their game up and provide new insights and niche material to their clients, rather than duplicating what firms are already doing in-house or receiving as an execution add-on, decommoditization of this valuable product will occur.

On Wall Street, Sell = Salmonella

If you read Dana Cimilluca’s story in yesterday’s Wall Street Journal titled, “Research Analysts: Best-Paid Concierges?” (click here for story) and thought, “That’s just absurd!” - you’re with us.

In the independent research world, we tackle this issue on a daily basis. Some independent research providers pride themselves on their abilities to set up company management meetings for their clients. In fairness to them – in many cases, this is what clients want. We are constantly surprised at the interest and desire amongst our hedge fund and bulge bracket firm clients to have such meetings. Not to suggest that company management doesn’t have anything insightful to say – but when have you ever been to a company meeting where the company provided insights into how they are falling short or worse - failing?

What is the true value of these meetings? And more importantly, are they really worth paying commission pricing for? Are there actually companies out there who are unwilling to sit down and meet with hedge funds and other institutional investors without a middle man (analyst) being involved? Wouldn’t it be much more simple and cost effective for these high powered investors to go directly to company management and arrange a meeting?

"The Catering Business"

We affectionately refer to our research counterparts who focus on company management luncheon schmooze sessions as ‘The Catering Business.” In the catering business approach to research, an analyst issuing a SELL (GASP!) recommendation on the host company is the equivalent of serving up salmonella to the black-tie crowd at Cipriani.

Besides the fact that regulatory rules won’t allow for companies to really open up in these meetings, does any party involved really expect an analyst to offer up an objective, insightful, potentially critical report after a company has played host to interested investors?

If so, we respectively contend these people reside in FantasyLand.

Since access to companies is important to analysts’ abilities to do their jobs, it’s no wonder sell recommendations this year have dropped to 7% (according to WSJ story). Our question is, why would anyone want such conflict-ridden research, let alone pay for it? Do these people still have Jack Grubman on speed-dial?

Isn’t it about time that analysts band together and raise the bar for objective research? Isn’t it up to analysts to manage companies’ expectations about what a company meeting entitles them to? It should be a chance for them to be heard – not an automatic guarantee of a buy rating.

Analysts should take a page from journalists and recognize that their job is to provide objective and insightful perspectives – not make friends. Fears of being stonewalled, bruised egos, and negative market impacts should not have any impact on the integrity of an analyst’s research.

StreetBrains believes analysts should leave the catering to Cipriani, and focus on writing insightful, objective research.

Rejecting Researchecution

Just as Hollywood’s got Brangelina and TomKat, Wall Street has Researchecution: a hybrid coupling that seemed like a good idea once upon a time, but ultimately has the shelf-life of canned fruit.


The days of Researchecution – the ‘bundling’ of research and execution costs - are very close to numbered here in the US, and are already a thing of the past in the UK. Increasingly more Wall Street firms are asking themselves why they continue to bundle these services, and the case for client commission arrangements (CCAs; commission sharing agreements/CSAs; soft dollar arrangements, etc, etc.) to aid ease of payment for a la carte research - while enabling best execution pricing - is gaining traction. However, this isn’t the first divorce that some on Wall Street have been reluctant to embrace.

Not long ago, you may recall the painful breakup of investment bankers from their beloved research desk counterparts. Although research had been a supportive and loyal partner, investment bankers abused the relationship, and eventually divorce ensued.

The same separation is imminent for research and execution. The issue of transparency over what monies pay for execution vs. what monies pay for research will eventually come center stage – whether it be on a regulatory level, or internally at firms as they struggle to justify all spending in the current volatile market.

The questions that firms are starting to ask themselves are: “What are the benefits to unbundling research from execution? Will it save my firm money? Is it necessary? If so, why has the SEC not implemented a rule requiring unbundling? What advantage will it provide? Will it cost me more in compliance?"

Integrity Research’s blog on Sunday offers a ‘state of the union’ for the current environment for CCAs. At StreetBrains, we’ve been having these same discussions with clients and potential clients as well. The landscape for CCAs is still somewhat uncharted territory and some firms are hesitant to jump on the CCA bandwagon. However, an increasing amount seem to see the value and advantages to unbundling.

To answer the questions above:

1) The benefits of unbundling research from execution are many. First, you will be able to ensure you are getting best execution pricing (since you won’t be ‘factoring in’ research costs.) Second, you can pay solely for research you want and use, rather than being bombarded with research you neither want nor need. You can establish relationships solely with those research providers you value and trust. Third, unbundling research costs from execution costs make for more transparent bookkeeping – and although there is no rule that currently requires that level of transparency, the likelihood of such a rule coming about is imminent.
2) There is little research out there thus far showing whether or not unbundling saves money. What we do know is that unbundling helps firms to more accurately assess the value of their research purchases, so they are able to adjust spending accordingly. Although the cost savings are still unclear, what is clear is that unbundling provides a clearer picture to assess what you are paying for. In a market environment where purse strings are tightening, the ability to pinpoint the cost: value ratio is of utmost importance.
3) Although there is no rule currently requiring research to be unbundled from execution pricing, such a rule is likely to come – and soon. So, using CCAs would seem (and does seem, to many of our clients) to be a no-brainer – stay ahead of the regulatory curve; get a clearer picture of what your firm is spending its money on; and pay for what you value. (best execution, and great research.) Additionally, unbundling improves transparency without adding to compliance costs.

Many more firms are beginning to understand the implicit value of unbundling, and are looking to independent research providers such as StreetBrains as they divorce Researchecution. To learn more, please visit our complete “Myths and Facts” page that helps dispel some common myths about paying for independent investment research.

What Makes Research 'Valuable'?

One of the annoying buzz phrases that all independent investment research companies and analysts grapple with is:

What is our value proposition?

While the term itself is cliché and overused, the question is a pertinent one. The simple answer would be to say ‘it’s all relative.’ To some extent, that’s true. Instead of trying to define value, we’re going to outline the questions we (and our analysts) find ourselves grappling with as we develop research that reflects the needs of our clients.

First, does the investor need new, fresh investment ideas? Are they looking for new trends/sectors to look at that they have not paid attention to before?

Does the investor have ideas and just needs to see research that supports or clarifies the ideas? Or does he want research that says the opposite of what he’s thinking/seeing, so that he better understands the full picture?

Perhaps the investor is looking for new, smaller companies who are up and coming? Or insights that are contrarian?

How far ahead do they want to look? Are they long or short term, and are they trying to shift that strategy?

The truth is –it’s simply not a perfect science. Unfortunately, research needs don’t fit nicely into any single one of these boxes.

Perhaps the proper differentiator is much more simplified. What if the analysts are able to tell a story that no one else could possibly tell? For instance, an oil analyst who’s been an oil company CEO, and spent a lifetime in the energy sector; or technical analysts who use a proprietary analytical technique; or analysts who cover 6 times as many companies in a specific sector as most of their competitors?

What better way to ensure that your insights are valuable than to bring to the conversation something that no one else can?

The jury is still out as to whether we’ve re-discovered fire, but, feedback from the StreetBrains ‘Ask the Analysts: 2008 Outlook’ panel yesterday certainly suggests we’re doing something right. (click here for materials from the panel event.)

November 27th, 2007: Happy New Year!!

Remember when you were in college, and you would set your clock ahead by 45 minutes to ‘trick’ yourself into getting up in time for class?

Today, we’re encouraging all investors to ‘trick’ themselves - think like today is the start of 2008. Pop some corks, throw some confetti - and reevaluate the information you base you’re trading decisions on – get yourself back on track to succeed.

As we embark on this New Year, keep in mind that there’s one simple investing mantra that separates the savvy from the inept:

Buy on Call, Sell on News.

Many investors seem unable to avoid the plight of piling onto a sinking ship. Not to overuse our boating metaphors, but, once a ‘call’ is in the news – it’s safe to say that ship has sailed.

Particularly in a world where investing ideas are sanitized and Cramer-ized – trading decisions are often hinged more on what has happened than what will happen. While that strategy might sometimes work in a bull market, the bears will eat you alive.

Unfortunately, many investors don’t have the discipline to resist the allure of a company that’s being hyped in the news. Particularly in today’s world where access to company information is so abundant, many investors mistake awareness [of a company’s present] for insight [about a company’s future] and as a result of the poor investment decisions that ensue, they are left with miniscule returns – or worse – losses.

This week, StreetBrains is hosting an event to help reset the focus for investors. Our ‘Ask the Analysts: 2008 Outlook’ panel will address some of the big calls our analysts are making for 2008 to help investors get out in front of the ball. The analysts will discuss what they are forecasting for their coverage sectors; what will happen to the economy; what will be different by 2009. These are the issues that seed lucrative trading ideas – not today’s Wall Street Journal headlines.

Thinking out ahead of the news – not following the news – is a tough tactic to constantly deploy when most of us find it overwhelming just to keep up with and digest the information that is current. But, discipline and great investment insights will be key to navigating the turmoil that will take place in the markets in 2008.

Here's to '08!

In-House Research: Threat Level: Elevated

Tumultuous markets are leading to an increasingly treacherous landscape for in-house analysts at large and mid-sized firms alike. While the majority of the blame game is taking place in the credit arena, soon, it is likely to penetrate other areas as firms search for ways to regain some of their lost revenue. Before long, the in-house research desks will be asked to stand before the tribunal and prove their worth.

In-house research has been the red-headed stepchild within firms since the fallout in 2001. Seen as a cost center, the research desk has been tossed around from division to division within firms, with no one wanting to take on the ‘overhead’ of supporting them. In a tightened market, the ‘hot-potato’ toss will likely resume for who is responsible for the in-house trading desk.

Are the days of in-house research over? Will we see all research end up being outsourced, where firms can more easily scale their usage of research with the rise and fall of commissions and revenues? It would seem that the day is nearing where these questions are seriously asked.

In any case, it is likely that an increasing number of great in-house analysts will jump ship and move into the independent side of the business to places like StreetBrains.


Making the case for independence

While having a big firm's name to put on your business card used to grant instant credibility for analysts, now, many industry peers will instead make the assumption that your research is a) tainted or b) commoditized. You turn on CNBC, and more and more lesser known firms are popping up as credible, independent sources, whose insights are not commoditized. The playing field is leveling – and rightly so – where the success and credibility of an analyst is more a reflection of track record than affiliation.

Independent analysts are also helping their own cause by proving time and again that it’s not just the big boys who have the tools to get calls right. On the contrary, in a constricted market, it’s hard to ignore the possibility that leaks and cracks in those ‘Chinese walls’ between investment bankers and research desks may deteriorate quickly when a firm’s best interests are at stake. For many institutional investors, it’s just not worth the risk to rely on this type of questionable intel when placing big trades.

So, while highly scrutinized (sometimes unfairly) large investment firms walk the tightrope of finger-pointing and protectionism – the path is being cleared for independent analysts to step up to the plate and establish their value.

While the internal battles ensue at the big Wall Street firms, those analysts who have found the right formula and business model are in a position to capitalize.

We Called It

Moderator’s Note: Every week or two, we’ll be putting together a brief update section, such as the below to give our readers an update on how our analysts are doing and where their insights are being published. Check back for more calls-come-true!

As mentioned in the previous post, Photizo Group – part of StreetBrains independent research consortium – was the sole analyst group (1 out of 14) on the Street to have a BUY rating on LXK (Lexmark International). After having this fact highlighted in an article in Sunday’s Barron’s, the stock jolted up 2.08% on Monday - a day when the DJIA was down 1.66%!

Also over the weekend, DebtVisions was cited in the FT, after calling that the Alltel deal would have trouble getting done.

Two other StreetBrains analysts kicked off the holiday week with timely calls:

• MediValu was one of very few analysts to have a BUY rating on Pharmion (PHRM), with a $55 price target. Pharmion was acquired by Celgene (CELG) for $72 a share.
  
• The Bank Notes put a BUY rating on Franklin Bank Corp (FBTX), calling the15.28% drop off in the stock price on 11/19 “unfounded.” The analyst covering FBTX for Keefe, Bruyette & Wood seemed to have the same sentiments – he issued the same call this morning. Together, they seem to be the only two analysts ready to stick their toe back into the water of this stock.

Last but not least, have we mentioned that StreetBrains’ oil analyst, Sterling Account, is up over 43% on its calls for the year? (As per Sterling Account, please click here for full details of their calls.)

More to come....

He Who Stands Alone....

Henrik Ibsen once said, “The Strongest Man in the World is He Who Stands Most Alone.”


The same can be said for investment research – the strongest research is that which sets itself apart entirely from its peers.

In a story in this week’s Barron’s, one of the Street’s brightest, most well respected investment columnists, Michael Santoli, pointed to insights from StreetBrains’ analysts, Photizo Group, to support the idea that LXK (Lexmark International) is a BUY - despite the fact that 13 of 14 analysts on the Street have a SELL or HOLD rating on the company.

Photizo Group – the leaders in imaging industry research – are the sole analysts rating LXK as a BUY.

StreetBrains clients who read Photizo Group research have been privy to these insights about LXK for months. This Barron’s story underscores the value of StreetBrains research: Our analysts are experts on niche industries, companies and sectors, and we provide insights that our clients aren’t hearing anywhere else.

In addition to the Barron's placement, DebtVisions - also part of StreetBrains research consortium - was featured in the Financial Times this weekend, discussing the unlikelihood of the Alltel deal getting done. (click here to read the full story.)

Indie vs. In-House Research: What’s the Difference?

A brilliant economist once said in a conversation with the media:

“[Brokerage] firms providing only their own research to clients (and no independent research) is like Gideon shoving Bibles in motel room drawers.”

The case for independent research has certainly been made – particularly after the global research settlement, but what still seems to be unclear is: what’s the difference?

From where we sit, it seems to play out like this:

Big brokerage houses have a research desk that covers, by and large, only the companies and sectors that it is expected to. That is not meant to be a criticism. Let’s put it this way:

If you’re an investor trading GE, and your brokerage house doesn’t have an analyst in house who covers GE, aren’t you going to be a little skeptical? Meanwhile, firms have had to cut back on a lot of research, so as not to cover companies or sectors that no one cares about.

As a result, it’s no real wonder why most firms have in-house research desks that seem to be in place more as a ‘CYA’ for the firm, rather than as the center for intel that they should be.

This is also no fault of the in-house analysts. Many of these guys would love the opportunity to make more ‘edgy’ calls. But for many, it could be an uncomfortable position inside the firm to be labeled as the ‘boat-rocker.’

Some might argue that it is the trader who has devalued the in-house research desk – because most traders have ideas and insights of their own, and really only rely on in-house research to support the ideas they already have – not to help generate new ones.

The in-house research model has become inherently flawed, but there’s no clear direction to point the finger at who’s to blame.

Independent research, almost more as the result of a forfeit, rather than a showdown, has become a champion in the research equation. Particularly truly independents – those who have no broker/dealer component - where analysts have become the ‘trusted advisors’ traders – entrusted to generate fresh ideas and offer new insights.

There could be room for everyone in this sandbox. Independent researchers to generate fresh, new ideas and insights. Traders to add onto those insights with some of their own, or to choose which insights to follow through on. And in-house research to support the traders’ decisions, and help protect the integrity of traders’ investment decisions.

But the hard truth is: Egos will always get in the way. Everyone wants to have the good idea. So all parties will want to prove that they are the source of the best investment ideas. That’s what we’ve set out to do with our analyst roster here at Streetbrains.

The good news for all independent researchers is that, for now, the regulatory environment; in-house turmoil and reporting changes; the volatility of the market – and of course, Gideon and his Bible-shoving - all underscore the need out there for our product.

Dispelling Common Myths About Independent Research

We spend a lot of time talking to our clients and to potential customers, and most days, the issues they discuss with us are the same. So today's blog will address the 7 most common misconceptions we hear - and offer our responses to the issues.

7 MOST COMMON RESEARCH MYTHS

MYTH #1: “All investment research is the same.”

FACT: StreetBrains takes research a step further than what currently lands in your inbox – our research focuses on specialized sectors, niche trends, and unique companies that will help you to garner unmatched returns.

MYTH #2: “There’s no such thing as truly independent investment research.”

FACT: StreetBrains has no investment banking arm or broker-dealer, so our analysts are able to offer opinions free of any conflicts of interest. Period.

MYTH #3: “My firm doesn’t pay for independent research – We get it for free.”

FACT: If your firm pays for execution and is provided with research as an ‘add-on’ or ‘bundled’ service – your firm is paying for that research. “Bundling” of research and execution makes for opaque record keeping, and will soon become extinct.

MYTH #4: “Unbundling research from execution services probably wouldn’t save my firm any money.”

FACT: By unbundling research from execution, you can secure best execution pricing. Then, you are able to take your research dollars and pay separately - and more transparently - for high quality research that delivers actionable information and profitable returns. Unbundling is gaining steam as the preferred approach to obtaining quality research.

MYTH #5: "When the global research settlement terms end in 2008, firms will do away with independent research."

FACT: Although the ten firms involved in the global settlement will not be required to distribute independent research, these firms, as well as most other large firms, have publicly noted their intentions to continue offering third-party research. Because the global settlement required firms to handle their in-house research differently, independent research continues to be a valuable asset to the firms.

MYTH #6: "Soft dollar payments for research will soon be eliminated."

FACT: Although the issue of soft dollar payments looks likely to move to the SEC's front burner before the end of 2007, it is unlikely that soft dollars will be eliminated. It is unlikely that more disclosure and regulation will be required under current soft dollar arrangements, however, the SEC will be looking for ways to show mutual fund boards how they can easily distinguish proper soft dollar arrangements from bad. License-fee payment models - such as StreetBrains' - help deliver transparency of pricing in soft dollars arrangements.

MYTH #7: "Fundamental research is still the most widely used and desired investment analysis."

FACT: According to a recent study by Integrity Research Associates, specialized research has outgrown fundamental research as the leading category of analysis for independent research providers in the UK. As fundamental research becomes increasingly more commoditized, institutional investors continue to search for analysis that gives them an edge on their competitors.

The Investor’s Dilemma: Drowning out the Research Noise

Calling all institutional investors - raise your hand if you agree with this statement:

“The volume of research I receive is impossible to review, and all it does is clutter my inbox.”

Yet another prospective client made this very statement today. It feels good to know we’re the solution, not the problem.

The tides have turned for investment research, and independent research providers, by and large, have not been quick to adapt to the new needs of their clients. Clayton Christensen (author of "The Innovator’s Dilemma"), who brought us the notion of ‘disruptive technology’ – would say that the investment research industry is missing a tremendous opportunity.

Consider this:

Not long ago, research reports used to stack up on our desks, and we’d have to sort through them page by page. Now, the new dilemma in research is that instead of research overrunning our desk space, it’s cluttering our inboxes.

Where does it end?

Some companies, such as themarkets.com think they’ve done clients a grand favor – they aggregate all of the research the client has purchased, and they allow them to filter it and make it searchable, so the volume of research is more manageable.

Perhaps I’m missing something, but wouldn’t it make more sense to just pay for the research you want – as opposed to paying for research you may or may not want and contracting another party to filter what you’ve paid for?

And then, taking it one step further, simply make that research available in one place, rather than having 75 emails in your inbox every morning that you’ll never be able to sort through?

Not to preach, but we think StreetBrains’ research solution would make Mr. Christensen proud.

Today’s Lesson: Unclutter clients’ inboxes. Provide to them what they pay for, in a format they prefer.

[Off soapbox.]

Welcome to The Brainstorm!

I’m Larry Margolis, moderator of The Brainstorm, and co-founder and Managing Director of StreetBrains. The Brainstorm is still in its infancy, so we thought we’d tell you a little bit about what you’ll be able to find here as the blog expands.

As you may know, StreetBrains is an independent investment research consortium that provides limited distribution research to qualified institutional investors. The Brainstorm is where our analysts come to blog about the topics they are most interested in, or the issues and trends that are on their minds in between research reports.

Additionally, The Brainstorm is where we talk about trends in the research industry – what types of research institutional investors are looking for in the current market; new regulations and what they mean for payment arrangements (CCAs, etc); new trends in how independent research is being used and who’s using it; and the myths about independent investment research that we encounter as we navigate the business.

We welcome the opportunity to hear your thoughts and suggestions. To ask a question, offer feedback or make suggestions, please contact blog@streetbrains.com.

Please check back regularly to see what we’re Brainstorming about.

- LM