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.