A Time to Vet

We do it every day, whether we realize it or not - when we meet and greet, when we dine, when we work, when we watch TV. We are vetting everything in increments. We are judging people, situations, events, products, even ourselves, almost every hour of the day. We quickly roll questions around in our heads like laundry in a dryer until we can make a decision on whether or not we want to accept someone or something into our lives.

Sarah Palin had to overcome a few obstacles this past week. She proved that no matter who you are, what you look like or how you speak, someone will always be asking, “How’d you get here?”

Who is she? What’s her background? Why Palin? Why a governor from Alaska? What has she done?

On the heels of her VP announcement and the unfolding of her teen daughter’s pregnancy, the republican vetting process was called into question. Everyone wanted to know how much exploration went in to her nomination. Many were confused as to what a vetting process even looks like. In the end, no one really knows what went into the vetting of Governor Palin, but if you’ve ever stringently vetted someone before, you might know that its not like finding a good cup of coffee – it’s so much more.

Interestingly, the StreetBrains website enjoyed a spike in web traffic this week with many visitors viewing our vetting process page. Many seemed to want to know more about the process and what it meant. Were they looking for answers as to how Sarah Palin was evaluated to be McCain’s running mate?

At the core of the StreetBrains vetting process is a meticulous examination of value. Before an analyst joins our platform, we want to know exactly what he or she has to offer our clients. We assess their professional history, methodology, points of differentiation, and the unique value their research provides. What can this research provider deliver? Do they have credibility? What do they do and what is the advantage?

Vetting is not a simple procedure. It takes a good amount of time and requires our undivided attention – we know because we do this every day. Essentially, the process necessitates a series of pointed questions that should challenge whatever or whomever you are vetting.

The days of plastering a pretty face on the screen and assuming your audience will bite are long gone. The recent interest in vetting proves that your audience needs and expects more. Vetting is a process that should be taken seriously. Our analysts are put through it, our leaders are put through it – perhaps accountability isn’t lost on our society quite yet.

Expert Networks: Elephant Trap?

According to Integrity Research, “at the end of 2007 at least 26 firms generate between $325 and $375 million in sales by providing expert network services to the buy-side.”

It’s undeniable that the demand for experts of all shapes and sizes has grown exponentially in the past couple of years, and will continue to grow as market volatility drives the need for more information upon which to base trade ideas. Since the implementation of RegFD, it has been increasingly hard for investors to ‘go to the source,’ for any useful/actionable information, so expert networks are a seemingly sensible way for hedge funds and other institutional investors to get a lay of the land without having to wait for company ‘spiel’ to be released.

But, with no real obligation to properly serve the interests of investors, the ‘experts’ – no matter how carefully ‘vetted’ by the network itself – are still not in any way, shape or form, accountable or held to the same standards as a Registered Investment Advisor (RIA). The further these networks expand, the more difficult it will be for networks - and regulators - to keep a pulse on credibility and expertise.

Because regulation of pure-play expert networks is still rather lax, the level of accountability for the experts themselves is minuscule. There has not been a major incident…yet. But if there were to be a major incident today, the information provider (expert) is not held accountable by any standards at all…which should cause investors to proceed at their own risk.

Of course hedge funds and other institutional investors are, by and large, big boys and girls, who should be able to make decisions for themselves about information they find credible and information they do not. But if one of these institutions loses millions or even billions after being mislead (purposely or not purposely) by a so-called 'expert' – who will be to blame?

More Landmines

Beyond the lack of regulatory oversight, there are two other downfalls for pure-play expert networks. The first is that these experts are not exclusive to any one network. So, in essence, these experts could be delivering the same insights to all of your competitors – or worse, in cahoots with the competition. With some hedge funds and other entities choosing to launch their own expert networks, it’s clear that many are not comfortable with the lacking exclusivity that exists in the industry.

The other downfall is that expert networks are a purely ‘pull’ model. What we mean by that is, you have to have the ideas first – there is no dialogue, or anything coming in to you. So, sure, you might wake up this morning and decide that pencil erasers are the next big thing, and you can find a whole range of experts to tell you why they are, why their not, and even put together a custom report outlining how and why – but you have to conjure the notion of pencil erasers as the next great investment all on your own.

At StreetBrains, we believe that the true value of expertise, in any realm, is for experts to offer both ‘push’ and ‘pull’ insights. StreetBrains calls this model the Actionable Information eXchange (AIX.) More specifically – after enduring our stringent vetting process, analysts are accessible and available to discuss incoming ideas, but also push out to clients fresh information and ideas they are encountering as they assess the markets. Furthermore, this information is delivered exclusively through StreetBrains research HUB, to a finite number of customers.

To learn more about the benefits of the StreetBrains AIX, click here.

Wall Street Sings the Executioner's Song

Yesterday, Sara Hansard at Investment News wrote a brief update announcing that the SEC will soon be releasing new guidance on soft dollars. Although there is no indication that the SEC plans to mandate the explicit separation of research dollars from execution dollars, it seems clear that they endorse the value this separation of services brings to investors, and will be watching carefully to be certain that firms are providing this level of transparency to their clients.

In the article, Jennifer McHugh, senior adviser to the director of the SEC’s division of investment management explains that the separation of research and execution has “had a positive result.”

Although soft dollars (or CCAs/CSAs) were not immediately embraced by most large U.S. brokerage firms, the inevitable separation of research from execution services is leading many large firms to seek opportunities to partner with independent research providers (IRPs). By doing so, these firms are hoping to keep a tight leash on their execution dollars - even if it means abandoning their own in-house research offerings for the more lucrative/less overhead option of IRP partnership.

To no one’s surprise, in-house research may once again face the internal firing squad, as their execution-focused counterparts have increasingly less success selling their commoditized research.

The New Arm Candy

While IRPs may be the new arm candy for execution providers to shop around to clients, this could potentially be a detriment to the end user. Great research will have a difficult time setting itself apart from the pack as more providers gain the ‘endorsement’ of execution firms who are looking to coattail on IRP trade ideas by securing the execution business on the back end of the trade.

For this reason, anyone using independent research will need to be very selective about research providers they choose to work with. The vetting process for finding quality research is a critical component for finding top quality ideas and insights.

Click here to learn more about StreetBrains vetting process.

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.