The Information Pendulum: Swinging Back to Pre-’03?

On Sunday, Integrity Research blogged about the consolidation they continue to anticipate amongst the 1,735 alternative research providers (ARPs) in their database. The blog got us thinking about the future. We certainly agree with Integrity that a consolidation period is coming, and it’s not a matter of if – but when.

We would anticipate that mid-2009 (if not sooner), when the global settlement ends, there will be an enormous shake up in the industry – the effects starting to occur now, as many struggling and mid-tier ARPs are looking to anchor onto larger entities in anticipation of losing settlement dollars.

The actual settlement dollars are fairly confined to a select few beneficiaries, but the demand for alternative research that came about as a result of the global settlement will still be threatened when the ‘cease and desist’ order ends in 2009.

The end of the global settlement will probably be a lot like Y2K – something that will drive a lot of buzz, but other than that, will be much ado about nothing.

Still, the attention that will be placed on independent research as a result of the pending ‘end’ to the settlement will drive many firms to reassess their research needs, and to consolidate accordingly.

The Consequences of Consolidation

Consolidation in the research industry is not necessarily a bad thing, as long as there are independent entities that band together and remain independent in their thoughts, ideas and transparency, and they remain entirely separated from their influential investment banking and trading brethren. Once that pendulum swings too far back in the other direction, investment information could end up back at square one.

The risk that lies ahead is if research becomes too consolidated, and those entities eventually become larger, more ‘groupthink’ type delivery models, much like the pre-’03 research that came out of Wall Street. The danger of ‘consolidated’ ideas is that it creates an unhealthy imbalance to the financial markets when many investors are making their moves based on commoditized information. As we all know too well from both the current credit crunch as well as the ’01 bubble burst, irresponsible investment research consumed by the masses can lead to fatal consequences for our financial markets and economy.

Consolidation in the research world is likely inevitable over the course of the next year. However, providers of independent/alternative research would be wise to band together in the name of independence, and to continue to push the envelope by delivering a diverse offering of products through a variety of channels to limited audiences.