New York – A recent blog on the CFA Institute website discusses the reputational risk of using expert networks, while providing strong support for mosaic theory and more equivocal support for the expert network industry itself.
The blog, authored by Glenn Doggett, a director of standards of practice for CFA Institute, cites growing unease with using expert networks: “Given the value of one’s reputation to long-term professional success, many on Wall Street are now reconsidering their association with expert networks. The New York Times has reported that both buy- and sell-side firms, including Millennium Partners, Och-Ziff Capital Management, Credit Suisse, and Morgan Stanley have either stopped using or are adjusting their policies regarding expert consultants.”
The issue extends not only to clients, but to experts utilized by the networks: “It is not just the firms using expert consultants that are beginning to worry about their reputations. Michael Lynch, a consultant working through the Gerson Lehrman Group, recently commented on the company’s blog that he may consider withdrawing his consultant services if the expert-network industry cannot improve its overall image. Lynch noted that the hourly rate he earns cannot replace the loss of personal reputation through guilt by association with those who are simply peddling inside information.”
The blog notes that regulators have repeatedly stated that there is nothing inherently wrong with expert networks, in remarks by federal prosecutors and the SEC. It also notes that, “The Commonwealth of Massachusetts went one step farther in affirming the expert network industry in April, when Secretary of the Commonwealth William Galvin proposed new requirements for firms dealing with outside consultants.”
The blog reaffirms the support for the mosaic theory which is at the core of primary research: “CFA Institute strongly supports the fundamental analytical process and the various sources that may be legally used within a mosaic theory analysis.” Expert networks, or their successors, are likely to continue: “companies and individuals will need to individually judge the potential reputational impact of using expert consultants [but] given the need for quality information, the expert network industry — or its next incarnation — undoubtedly will remain a part of many analysts’ toolboxes.”
The CFA Institute’s somewhat equivocal support for expert networks reflects its own reputational risk as the investigations continue apace. The Institute, like the analysts that comprise it, seems to believe that expert networks are a valuable tool for research, but the current environment makes full throated support, as well as usage, difficult.