New York – Jules Kroll, founder and former chairman of global risk consulting company Kroll Inc., has recently completed the purchase of LACE Financial, a small credit-ratings firm based in Maryland.

Kroll, now 69 years old, started the Kroll Bond Rating Agency last year in an effort to provide a “credible alternative” to the top 3 ratings agencies (S&P, Moody’s and Fitch) after the AAA ratings they gave to the top tranche of U.S. subprime-mortgage bonds before the market collapse in 2007.  Jerome Fons, the executive vice president for strategy at Kroll has stated that initially the company will focus on residential mortgage-backed securities.

LACE Financial’s main attraction to Kroll was likely the fact that it has Nationally Recognized Statistical Rating Organization status, which it was granted by the SEC in 2008.  Even with the merging of Kroll Bond Rating Agency and LACE (LACE will maintain its name as a unit of Kroll) the firms can not yet compete on a pure manpower or market share standpoint.  Kroll will likely have about 24 employees compared to 1,300 and 1,200 at S&P and Moody’s rating divisions respectively.  The top three ratings agencies also still issue approximately 97% of all outstanding ratings despite the passage of a law in 2006 designed to increase competition.

Entering the ratings business is a new direction for Jules Kroll who made a name for himself through his investigative work for the financial sector in the 1980’s by profiling investors, suitors, and takeover targets for corporations.  After selling Kroll Inc. in 2004, Kroll remained Chairman until 2008 when he left to pursue other business ventures.

The Kroll Bond Rating Agency is not the only one to have made a move like this in the recent past.    Morningstar recently paid $52 million for Realpoint LLC, a company which was licensed to allow it to rate structured-finance transactions.

Whether or not new competitors can break into the oligopoly at the top remains to be seen, however they do have a couple of points working in their favor.  Trust in the old guard of ratings agencies is currently low, with a portion of the blame for the subprime mortgage crises being placed on their shoulders.  Congress also passed the Credit Rating Agency Reform Act of 2006 with the supposed goal of increasing competition in the credit ratings market.   Legal troubles may also come into play for the well established ratings agencies.  One example of such troubles being S&P’s recent appearance in a court in Frankfurt over its ratings of Lehman before the bank’s 2008 collapse.

Even with these advantages however, new competitors struggling to break into the credit ratings business still face steep challenges as this note from Richard Blumenthal in 2009 highlights.  Ratings agencies in general have also been more proactive in keeping an eye on their ratings, a trend which was shown in the recent downgrade of The Irish Republic’s credit rating by S&P.

Competition is generally a good thing, and certain similarities can be drawn between the 2006 Credit Rating Agency reform act and the 2003 GRAS settlement.  Both have come about after companies providing information to the Street have been shown to be lacking in some regard and both have tried in some fashion to break up the oligopoly at the top.

New York – Maven Research just executed a deal with Business Connect China (BCC) to offer BCC’s experts across Maven’s Global Knowledge Marketplace. Maven’s model is a transactions-based approach that allows clients to access experts without being assessed platform fees, like the larger expert network models do.

Business Connect China Inc. (BCC) is an expert network made up of managers, civil servants, scientists, engineers, attorneys, and entrepreneurs from around China. This collection of experts provides consultation, market intelligence, advisory services, investment, and events for the China market. BCC helps global financial services firms, professional service firms, corporations, and academic and nonprofit institutions make decisions on investment and business strategies in China. The firm has a technology and research platform to support its expert network, custom research and structured product offerings. Further, the firm’s searchable database of experts was developed using taxonomies and profiling tools to accurately classify each expert’s experience and expertise. The firm operates in four locations: San Francisco, Hong Kong, Shanghai and Beijing and is able to provide translation services, global teleconferencing capability and discreteness in setting up client-expert interactions when needed.

BCC provides clients with one-on-one consultations, customized surveys and reports, customized consulting engagements, Industry news services, due diligence and advisory work and in-house professional investment and venture capital arm. In addition, BCC performs custom research allowing clients to dictate research topics. The firm then pairs clients with analysts and experts for deeper consulting and analysis. The firm covers the following industry sectors: financial services, consumer goods and trading, healthcare, media, real estate and construction, education and professional services, transportation and logistics, and energy.                                                                                               

Maven Research, Inc. is an online knowledge marketplace and consulting network. The firm connects knowledge seekers with industry professionals for short-duration telephone consultations and custom surveys. Maven Research offers direct, transparent, and transactional access to our entire network without up-front fees, subscriptions, or middlemen. The firm’s marketplace approach allows clients to make decisions about the costs of engaging with specific experts. The consultation and survey systems allow clients to only pay for what they actually consume.

Maven Research allows its clients to perform their own private searches of its network and engage directly with relevant experts. Maven aims to make appropriate introductions, ensure privacy and confidentiality, and then allows clients to move forward as they see fit. Maven’s compliance system is focused on providing clients with tools to set their own criteria for expert recruitment.

New York – Asia-based independent research providers are forming a new association, AsiaIRP, a sign of the growing population of alternative research providers in Asia.

AsiaIRP has an affiliation with its European counterpart, EuroIRP, and is also reaching out to Investorside in the U.S.  The association plans an official start date in November, and will have at least seven members at launch, including Responsible Research, Lombard Street Research, Asianomics, and DSGAsia.

The association is incorporated in Singapore, and will be active in Hong Kong, reflecting the locations of its founding directors, Lucy Carmody of Responsible Research (an ESG research firm based in Singapore) and Edward Stockreisser, who heads economics firm Lombard Street’s Hong Kong office.

The number of alternative research providers based in Asia has been growing.  We track over 200 Asia-based independent research providers in our proprietary database of research firms. A quarter of the firms are fundamental boutiques and nearly one-fifth are economic firms.  Primary research firms represent about 16% of the total, including Asian-based expert networks, channel checkers and survey firms.

When EuroIRP was founded five years ago, Europe had an equivalent population of alternative research firms.  Now we track over 450 European-based independents.  Given the interest in Asia-based research from US and European investors, it is likely that Asia will see a similar growth in the number and diversity of providers.

In addition to full memberships, AsiaIRP offers associate memberships (for research distributors, aggregators, or other non-research firms) and partnerships for sponsors who wish to help fund upcoming AsiaIRP events.  IND-X Securities and Instinet have agreed to be AsiaIRP Founding Partners.   The association is receiving public relations assistance from Kristin Westlake of Sydney-based Continuum Partners and Westlake Communications.

For more information on the organization contact info@asiairp.com.

New York, NY – A recurring theme that we at Integrity Research have communicated over the past seven years has been that all investment research — whether it originates from sell-side investment banks or from the growing ranks of independent research firms — is sold, it is not bought.  We have never believed in the “Field of Dreams” model for research,  that is build it and they will come. 

Over the past nine months, a number of independent research firms have come to a similar realization as they have tried to rebuild their businesses in the wake of the market turmoil in 2008 and 2009.  Consequently, many indies have recently been looking for ways to solve their sales and distribution problems.  The following blog discusses this topic in more details.

Building Your Own Research Sales Staff

There are two obvious ways that research firms can deal with their research sales issues — buy it or build it themselves.  Unfortunately, most independent research firms that are looking to address this issue is, by definition, either small, or they have experienced a deterioration in their business that they are trying to reverse.  Consequently, building their own research sales capability seems to be out of the question. 

We think that research firms should think about this option more seriously for a number of reasons.  First, is economics.  Our analysis indicates that over the first three years, hiring and supporting a single research sales person could cost a research firm $200,000 to $300,000 per year.  Of course, hiring a larger team would cost multiples of this total.

On a cumulative basis, this investment represents between 30% to 80% of the cumulative revenue this salesperson should be able to bring in over this period.  However, over the first five years, the cumulative cost of a salesperson should drop to a much more reasonable 20% of the revenue that he or she has generated.  

Another reason we think that independent research firms should consider building their own research sales staff is dedication and focus.  An employee is able to dedicate themselves completely to selling the firm’s research services, and if their compensation plan is structured appropriately, their primary income is derived from helping the firm grow the business. 

Unfortunately, many independent research firms cannot afford the $200,000 to $300,000 per year per salesperson that it costs to hire their own staff.  In addition, some of the founders of research businesses don’t have the expertise or the inclination to hire and manage their own sales staff — and believe me it takes considerable management to maximize the return from a sales force.  Consequently, many independent research firms are left with the option of outsourcing their sales function to outside parties.

Buying or Outsourcing Research Sales

There are three different types of firms that typically provide external research sales capabilities to firms looking to outsource the sales of their research products to the buy-side.  This includes investment banks, agency brokers, and independent sales agents.  We will discuss more about the specific strengths and weaknesses of each of these types of players in next week’s blog article on this topic.

The benefit of most external research sales partners is that the research firm does not have to invest the $200,000 to $300,000 per year per salesperson that they would have to spend to build their own staffs.  Instead, the research firm pays a sales commission on each dollar of revenue they have generated for the research firm. 

In addition, most external research sales partners have considerable expertise in selling independent research as this is all they do.  Most research firms don’t have this skill.  Also, most external research sales partners have developed customer relationships they can leverage to market new research products to.  Another value that some third-party sales partners bring to independent research providers is related to product development, positioning, and pricing.

The primary negative of external research sales partners is that, over time, the sales commission they receive can greatly exceed the amount a research firm would have paid out to their own sales staff.  This is particularly the case the higher a commission rate the third-party receives, or the length of time the third-party receives this commission.  Most third-party sales partners charge between 25% to 50% of the revenue they generate, for a period ranging from 3 years to the life of the client.  Thus, over 5 years, a firm that charges 30% for the life of a contract would be considerably more expense than the 20% effective rate that firm would pay by hiring their own salesperson.

Another negative of many third-party research sales partners is that they are not terribly committed to or focused on the success of any one research firm.  They naturally focus on selling whatever sells.  This is particularly a problem with sales agents that market a large number of research products.  Often sales agents lose interest in the research firms they have been selling for awhile in comparison to new more exciting research products.  Unfortunately,  research firms take a large risk if they rely on distribution partners that are not completely committed to their growth.

Next week we will discuss the strengths and weaknesses of specific types of third-party research sales partners, and the factors that are critical in finding a good partner.

Boston – Pulse Trading, a national independent brokerage firm headquartered in Boston, today announced that it has added Cross Research Group LLC to its Pulse Research Partners Platform (PRP). Cross Research is an independent equity research firm that focuses on the tech industry.

“We are excited to partner with the Pulse Research Platform,” said Shannon Cross, co-founder of Cross Research. “Through rigorous analysis and on the ground research, we provide our clients with unmatched coverage of technology companies and trends. We share with Pulse a special commitment to provide both excellent customer service and a differentiated product.“

“Cross Research is an important addition to the Pulse Research Platform,” said Jeff Forbes, Director of Pulse Research Partners Service. “Their analysts are unsurpassed in providing the best research and analysis in the global tech sector. With the addition of Cross Research to our team we’re giving clients what they want – a competitive advantage in this global economy.”

Some of the Pulse Research firms include:

Furey Research Partners

Thompson Research

Cirrus Research

Alembic Global Advisors

About Cross Research Group LLC:

Established in 2003, Cross Research is an independent equity research firm focused on the technology industry. Cross Research focuses on the IT hardware, IT distribution, imaging technology and enterprise software industries in the US and Asia. Cross Research analysts are known for their industry knowledge, contacts and company relationships. Cross Research, a broker-dealer and SIPC member, is located in Livingston, N.J. For more information, please call 973-376-8600.

About Pulse Research Partners:

Established over five years ago, the Pulse Research Platform offers a number of research products from broad based platforms to sector specialists, expert network services, corporate access, and technical research providers. Collectively, the group of research consists of 30 analysts who follow over 220 stocks. Five of the research partners have been included in Institutional Investors’ All American Research Team. For more information please visit: www.pulsetrading.com, or call 617-316-5633

New York – This week, The Wall Street Journal presented an article titled The Case Against Corporate Social Responsibility, which reflects an ongoing debate that can have serious repercussions for research providers in the environmental, social, and governance (ESG) space. Do companies have a responsibility to act in the public interest and will they benefit or perceive increased profits while acting responsibly? Depending on their answer to the question above, investors’ will have more or less appetite for ESG research.

In this article we outline the two sides of the debate on the social responsibility of enterprises, and analyze its implications for providers of research and information in the ESG space.

What is CSR?

The WSJ article arguing against CSR has spurred almost 300 positive and negative comments in 3 days (popular articles in the same section barely reach 90 comments). One interesting aspect of the debate is the meaning of CSR. “Social responsibility” is a notion that runs the danger of being so broad in scope that it can end up being meaningless.

One of the definitions that better encompasses the CSR notion is suggested by Professor Davis from Arizona State University, who believes that CSR refers to a company’s response to issues beyond the formal technical and legal requirements. Professor Davis argues that “[CSR] is a firm’s acceptance of a social obligation beyond the requirements of the law”.

Companies Should be Socially Responsible – For their own good

Supporters of CSR argue that companies can do well while doing good. Some of the arguments include long-run self-interest, public image, viability of business within a given society, avoidance of government regulations, and ultimately, stockholders’ interests. Even if the company’s business is not directly aligned with the social interest, by doing good the firm will benefit from assuring its long-term feasibility within a given society.

CSR is either Irrelevant or Ineffective

According to the mentioned WSJ article, claims for CSR are an illusion and a distraction from more effective initiatives to protect social interests.

“…in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against the shareholder interests.”

The real danger, argues the WSJ, is that efforts dedicated to CSR initiatives are a distraction from more effectives measures of protection of the social interest, such as governmental regulation and civil society movements.

ESG Research Providers Watch Out

Should companies be socially responsible for their own good? The debate around this question is not limited to academic circles. Companies and investors also have their own views on the matter, which directly affect ESG research providers.

Providers of information and research in the ESG space have conducted numerous studies, issued papers, and developed ranking models, in an effort to support the view that CSR, in terms of environment, social issues and corporate governance, does matter for the profitability and viability of the company. Investors who adhere to the CSR paradigm will certainly tap into these providers products.

However, as the WSJ article and its overwhelming response rate indicate, the paradigm against CSR is a strong one in today’s business environment. Apparently, all the case studies, ratings, and warnings from scientist, have not been enough to bring everyone on board of the CSR boat. This week’s article reminded us of one of the main challenges/opportunities that ESG research providers face today: Convince corporations as well as investors (among other key players) that CSR is neither irrelevant nor ineffective, and it is not a distraction from more effective mechanisms of protecting the social interest.

New York – The results of Integrity’s recent CSA/CCA report (see below) highlights the fact that the unbundling of commissions we have seen over the past several years, related to demonstration of best execution, have worked to the advantage of the agency brokers. Full service brokers were initially mooted to have an advantage in an unbundled world, simply because of their perceived ability to attract the trade flow, to institute systems designed to give clients greater ability to monitor the execution cost separately from their research expenditure, and offer adequate liquidity. Because research could be paid for through CSAs/CCAs, the full service brokers could offer execution and pay for third party research through CSAs.

In light of this, the results of the CSA/CCA report—that the agency brokers had in fact picked up market share—seems to be counterintuitive. That is until one looks at (a) the financial market meltdown and (b) the implicit costs of proprietary research within the full service broker community.  The first point gave the agency brokers time to take market share, while the bulge brokers were trying to right their respective ships. The second point relates to the bulge bracket commission allocation, which tends to set aside commission pools for the proprietary research provided to clients. While this is not included in the execution price, it is an added non-discretionary cost associated with doing business with a bulge bracket broker.

Agency brokers, however, do not have this implicit cost, so that they can be engaged for execution ability alone. This is indeed what the results of Integrity’s survey of buy-side accounts did show. But it is important to note that, at least anecdotally, a counter trend is developing. In recent conversations with agency brokers, we have detected a salient theme in their strategies for the future, which includes providing more services to clients in order to make their services more “sticky”. Part of this strategy includes the provision of research to clients.

For the alternative research space this is an opportunity to gain both extended distribution and potential sales representation.

The 99-page Integrity ResearchFocus® report details the survey findings including CSA/CCA usage patterns, comparative analysis and ratings of the seventeen most prevalent CSA providers, and Integrity Research’s 2010 Top Picks for Overall CSA Provider, North America, Global, Europe, and Asia. The report includes profiles on the top 20 CSA providers included in the study. The report is used as a “buyers guide” for investment professionals and other users of commission management services. For additional information, go to www.integrity-research.com/cms/csareport/ or contact Matt Bannister at 646.786.6851 or Jim Kempski at 646.786.6865.

New York, NY – Based on Integrity Research Associates’ 2010 ResearchFocus study on Commission Sharing Arrangements published last week, 28% of the buy-side users of commission management services at asset management firms felt that consolidating CSAs and CCAs through central CSA management platform would be “extremely valuable” to them, double the percentage that felt this way when we conducted our survey in 2009. 

2010 Survey Says…

In addition, more than one-third of the buy-side institutions surveyed felt that a consolidated CSA management platform would be “somewhat valuable” to them.  This data was collected through Integrity Research Associates’ survey of 214 buy side firms located in North America, Europe, and Asia conducted during the first quarter of 2010.

Integrity also asked buy-side participants what features of a CSA / CCA platform they valued most.  The top three features sited by CSA users included “payment of interest on unused commission balances”, “commission management tools and reports”, and “consolidated CSA balances”.  These three features were all seen to be “very valuable” by a similar percentage of survey participants.

Over 40% of the participants in this year’s buy-side survey of CSA users reported they felt that an independent firm would be the best potential manager of a consolidated CSA aggregation platform.  This compares to 21% who felt that an agency broker, and an equal number who felt that a broker consortium, would be the best potential managers of a consolidated CSA platform.  Only 11% of those surveyed felt that a bulge bracket investment bank would be an appropriate manager of a CSA aggregation platform.

Although 21% of those surveyed in the 2010 survey felt a broker consortium would be a good group to manage a consolidated CSA platform, this represents a sharp decline from the 38% who felt this way in last year’s survey.

Bulge Bracket Firms Lose Preeminence

It is interesting to note that over the past year investment banks have lost ground to agency brokers in providing commission management services.  As mentioned above, a minority of buy-side participants feel that an individual bulge bracket firm would be a good manager of a consolidated CSA platform (and only one-fifth feel a consortium of investment banks would be a good manager of such a platform). 

In addition, based on Integrity’s analysis bulge bracket investment banks garnered only 40% of the top 15 slots as best CSA providers in 2010, with agency brokers capturing the remaining 60%.  In Integrity’s previous study, based on a survey in the fourth quarter of 2008, all nine of the Integrity Top Picks were full service investment banks.

For More Information

Readers may learn more about this topic from the 2010 Integrity ResearchFocus® report on Commission Sharing Arrangements, published on August 18, 2010.  This 99-page report details the survey findings including CSA/CCA usage patterns, comparative analysis and ratings of the seventeen most prevalent CSA providers, and Integrity Research’s 2010 Top Picks for Overall CSA Provider, North America, Global, Europe, and Asia. The report includes profiles on the top 20 CSA providers included in the study. The report is used as a “buyers guide” for investment professionals and other users of commission management services. For additional information, go to www.integrity-research.com/cms/csareport/ or contact Matt Bannister at 646.786.6851  or Jim Kempski at 646.786.6865.

In response to a previous post on search engines that fail to understand the intentions of research analysts, Jack Roehrig, Executive Director of RIXML.org, suggested that the RIXML technology should be considered as part of the solution to the problem of drawing meaning from unstructured information:

In order to achieve proper “content in context”, research search engines are part of the potential solution. Another important part is at the “grass roots” research meta data TAGGING level. RIXML.org is a not-for-profit organization, consisting of research publisher, consumers and vendor intermediary organizations that embrace and adopt XML-based tagging standards for research. These days, research data structure is taking on greater meaning as firms build out their commercial constructs for research, in order to be paid for research that finds its way into client consumer “playlists”.

Please see http://www.rixml.org for further detail. We welcome new member participation.

For more information about RIXML, please see the site and the FAQ. Some of the key information about how RIXML benefits investment research users:

Q: Why is a standard like RIXML needed?
A: Currently, financial services firms publishing research content are using their own proprietary solutions to classify and distribute content. An industry-wide standard will facilitate smoother exchange of information. Research consumers will be able to find what they are looking for more quickly and easily.

Q: What are the benefits of RIXML?
A: The creation of RIXML as a common language provides a low-cost way to vastly improve the value of investment research.
In using RIXML as the standard, research content providers (e.g. the sell-side) benefit because RIXML:
Maximizes the value of research by making it more accessible
Enables transmission of new content types such as thematic research or earnings models
Enhances branding
Increases efficiency of distribution

For asset managers (buy-side), the RIXML standard offers the following benefits:
The ability to filter information
Enhanced search tools
Commingling of research from all sources
Personalization
Increased relevancy to their own portfolios

Currently, financial services firms that publish research are using their own proprietary solutions. This industry-wide standard will facilitate a smoother exchange of information from producer to consumer, whether the information flows directly or via a third party aggregator or vendor.

While this does not solve the problem of extracting meaning from the wider web, it does present a way towards solving some of the common information overflow problems faced by users of sell side research.

One interesting challenge for the RIXML group would be whether the concept can accomodate other types of non-traditional investment inputs.

As an example: users of expert networks frequently receive large numbers of expert profiles, suggested for their consideration, from expert network providers. These profiles may be sent via email or stored on the website of the expert network. For those who use different networks, that is a lot of information that needs to be aggregated manually. A standard language to tag and structure expert profiles may enable them to be aggregated and organized much more easily, using automated tools. This would provide better ways to organize and filter inputs from different providers, allow integration with client applications, ease the information overload problem faced by expert network users, and enable better monitoring of profiles for compliance purposes.