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.

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.