More folks in the institutional brokerage and banking world should be reading the stuff Seth Godin and others are writing about.Â We all have an intuitive feel about why the newspapers are dying in part because many of us no longer read them.Â
What about institutional brokerage?Â For one thing the consumers in this market are very slow adopters.Â Most of these folks attend meetings, listen to voicemail and use email as their primary sources of information.Â During the 90’s before the Internet adoption wave took off an analyst could have a huge amount of impact on technology stocks.Â However the cost of that impact was a highly trained and hardworking staff of institutional sales and trading that cost our small boutique upwards of tens of millions of dollars per year.Â It was highly effective and thanks to a steady amount of invest banking revenue and the ability to have multiple research analysts share that channel, helped everyone make a ton of money.
The crux of the problem with the institutional model is that it breaks down at revenue rates under $100M and gets pretty ugly and depressing from there.Â It’s just not a viable business.
We started our independent research business in April of 2005 and have sworn off any kind of distribution or marketing costs in favor of just focusing on research and leaving the rest to our network of contacts and the growing world of online awareness and distribution.Â (We’ve dabbled a little bit here and there to test our conviction it’s been clear that money spent there is money wasted.)
Despite all that and perhaps as one would expect our distribution and footprint has expanded steadily while we simply focused on doing research.Â Like any business we have faced challenges and continue to hone our distribution capabilities but they largely build themselves organically or through partners.Â At the same time our direct network has expanded by about 100% from what it was in April of 2005 to number about 500 direct client/customer types who we interact with on a fairly regular basis and can use to "get things done" when the need arises.Â
Now of course could salespeople add value, but they may make more sense in the form of distribution partners rather than direct staff.Â By staying lightweight and leveraging existing infrastructure we think that we can deliver all that we could before from a research perspective without the ancillary 50 to 60 people we needed in the 1990’s.Â It’s true the revenue level is much smaller but it works with the new expense structure to create research compensation and net operating margins in line with the 90’s.Â
Brokers and banks seem to have plenty of more things to worry about in the short term but if these dynamics are secular, some deeper thinking is still required there.