Wednesday, November 4th, 2009
the gold rush

The independent research portion of the Global Research Analyst Settlement put a few hundred million dollars on the table to be doled out to research firms by consultants like me.  Unsurprisingly, that made us very popular, as we chose those that could stake a claim and those that couldn’t.the research puzzle | This is the second in a series on the settlement.  This link will take you to an index of the postings on the topic as they are written.

It was about fifteen months from the announcement of the settlement to the provision of independent research, and the period was a blur of activity, as research firms tried to get in on the action.  The contenders were little firms and big ones, new and well-established, niche players and those with large universes of covered companies.  Some tried to roll a variety of capabilities together to serve as one-stop shops for technology, information, and research.  In other cases, there were new affiliations of providers, and consolidators who aggregated the work of a wide range of firms.

The overall feeling was that independent research was the next big thing in the business.  Thomson Financial published its first (and only) Directory of Independent Investment Research, almost five hundred pages in a bound volume of the type that used to line the shelves of every office, but that are increasingly rare in these days of digitization.

The settlement order laid down a couple of prohibitions and a set of criteria to guide the independent consultants in their choices of providers.  The regulators added some interpretive guidance along the way.  Within those parameters, each of the consultants needed to figure out how to spend the money set aside for independent research in the settlement order.  We didn’t lack for suggestions.

Some firms — mostly larger, established ones but a few upstarts too — could overwhelm you with information.  In the selling process, there’s a fine line between providing too much information and providing enough.  As someone on the receiving end, I generally prefer more than less, because on balance it makes the due diligence process easier for me.  Not because I accept what I see at face value, but because it gets a lot of information out right away, so that I can hone in on the anomalous items in a firm’s story more quickly.  That is much preferable to a series of general conversations or (God forbid) dog-and-pony shows that take far longer than they should for the amount of information imparted.  I’m going to get to the targeted questions eventually before making a decision anyway, so it’s best to see as much of the picture as I can before beginning the more intensive aspects of the review.

That said, a blizzard of paper and/or digital pages does not necessarily enlighten, especially if the substance is buried under mounds of marketing.  Across the range of firms I analyzed, there were distinct differences in how promotional the firms were in talking about their work.  (That variable served as information in and of itself about how the firm approached its business.)  Stripping away the fluff is relatively easy in most cases.  It is only when that cover cannot be removed for proper inspection of the substance that it becomes a problem.

To stand out in the crowd of providers, many firms made claims of greatness:  the best process, the best research, the best performance.  “Don’t you want the best?” was a question that I heard rather frequently.

Why, of course.  It’s just that there are many types of research, many good firms, and many ways to pull research together to solve an investment problem.  There is no one way and no best way.  Each of the consultants had to come up with a framework that fit the characteristics of the settling firm on whose behalf they were working, the nature of its research universe, its client base, and the amount of money it was required to set aside for independent research (which varied by firm).  My solution looked different than others, for what I think are justifiable reasons, and I’m sure the other consultants feel the same way about the choices they made.

Making the decisions to not use some firms that I admired and that I would have used under different circumstances was particularly difficult.  By not selecting them, I was not stamping them as substandard, but simply determining that they were not a part of my solution to a particular puzzle.  That was not an easy message to deliver and a harder one for quality providers to hear, since so much was on the line.  Had I been free to structure a solution outside of the boundaries within which I was operating, it would have looked much different.

As it was, I was faced with a situation where there were quite a number of worthy providers and many ways of putting them together.  I had to choose one and did.  Of most interest (hopefully, since I want you to keep reading) are some of the considerations I needed to ponder to do so, and which I will explore in future postings.