Friday, December 7, 2007

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.