Wednesday, January 14th, 2009
frozen in time

If you compare the electronic “stack” of research reports that clog the email systems of institutional investors to the paper documents in tall piles that littered the offices of an earlier era, it’s remarkable how little the reports have changed.  An average one is similar to its predecessor in most respects, and the inability of portfolio managers and analysts to keep up with the volume is timeless (although bytes at least have the benefit of not being unsightly for the office visitor).

There are many contributing factors to this lack of improvement, not the least of which is that we tend to continue doing what we have been doing.  Our old notions of who does what and what is needed are perpetuated; the sell side produces research reports and the buy side attempts to or pretends to read them.  One part of the issue is that the producing firms have not devoted enough effort to understand how their reports are used (or how the information could be used given the wonders of electronic communication).  More important for traditional brokerage firms are the regulatory rules; those pages of disclaimers and disclosures that are attached to the reports envision discrete dispatches of a firm’s views of an investment.  That way of communicating information is also then formalized by the research platforms which dutifully organize the information report by report.

The problem is that organizing the information that way doesn’t match very well with how decisions need to be made.  The PDF of today is the paper copy of yesterday:  inflexible, organized by the author not the reader, and dated in a hurry.Certainly there are advanced PDF capabilities that could improve on the basic experience; it’s just that they are rarely used by the creators of research reports. Day-to-day changes in a company’s fundamentals require manual updating of a model or a call or email to the research firm, which is not very productive for either the producer or the consumer, and strikingly backward given the technologies available.

Some tools can aid in dealing with the mess of research reports, including research management systems and advanced search capabilities within them or otherwise available.  They aid primarily in finding things, which is essential, especially for the “big content” that will continue to need to be produced no matter where we go from here.  However, they don’t disaggregate the information in a way that allows precise access or incorporation into analytical tools.  XBRL holds some promise in that regard, but it remains to be seen how it will be used in “official” channels, that is, regulated ones.

For those outside that way of doing business, there is greater flexibility to innovate.  The blogosphere and the Twittersphere can serve as petri dishes for experimentation, although they mostly produce opinions, arguably the least important element of analysis.Surveys of institutional investors always have “recommendations” outside of the top ten things that they look for from a sell-side firm.  While “independent” observers may be less conflicted, they still talk their own book. The pieces of the mosaic surfaced and the assumptions made by an analyst are the things of greatest value; there aren’t a lot of people online that communicate them well.

While the old business model of research may be dying, a new one is not yet clear.  Creating one requires firms to experiment, in ways similar to those of the New York Times, which has taken its online capabilities to another level.New York Magazine | This article by Emily Nussbaum examines the paper’s inclusion of “audacious new features” and integration of online sensibilities into the organization and ethos of the firm.  Especially noteworthy was management’s willingness to embrace radical change.  That’s unusual, even if some might regard it as a move of desperation given the challenges the business faces.

For regulated firms and regulators, it’s time to work together to move from the structures of a paper world to ones that protect the interests of investors but allow for an increased availability of information from knowledgeable sources.

Those firms that have more flexibility already — as well as the creators of information systems — should be working hard on new ways of communicating research information.  The current industry approach may be frozen for now, but spring is coming soon.