Business Week profiled the recent closure of Prudential’s equity research business.Â We’ve been watching this slow-motion train wreck since 2004 when we started Research 2.0.Â Â The article points out that some of the mandates on including competitive research will end in 2009; further reducing prospects for independent equity research.
The long-term decline is directly related to the shifts in the market which make it nearly impossible for an equity analyst at a major firm to have any time to actually do research.Â Between marketing, compliance, meetings, sales support and so on there is nothing left.Â Besides there are still far to many analysts publishing research without direct industry experience.Â This makes their ability to ground their financial analysis in business reality difficult.
The article does go on to question whether or not the companies themselves, particularly smaller ones, will have to start paying the bills to ensure ongoing research coverage.Â There is plenty of this going on today and it is probably a growth business.Â The problem with it is that it tends not to result in the best research output.Â It’s too soft and gentle – more like a book report than a critical analysis.Â Such work is still useful in cases where company fundamentals are not widely known but they are not very valuable.
As has been said many times before, if I had really great research why would I sell it to you for 5c?Â Good question.Â That’s another reason the current broker/dealer system is flawed.Â For one thing most would sell really good research for real money.Â Which means clients have to be well financed to afford it.Â Secondly it makes sense to give analysts exposure to their ideas directly if they want it.Â Such exposure should be fully disclosed with changes made only after clients are informed but the classic "put your money where your mouth is" is a great way to incent the best analysts to put forth the best, most well-researched ideas.
Being a sell-side analyst at a mainstream firm is still a good living, even if it is an uninspiring one.Â Creating new classes of research and online services will force instiutions to look beyond their own inhouse staffs for value and if it is there they will find a way to pay.Â