Buy-Side Spending on Independent Research – What Numbers Make Sense?


New York, NY – Last week, a number of articles were published suggesting that the independent equity research industry, which grew in the wake of the dotcom bubble bursting and the scandals surrounding sell-side research, is losing ground to sell-side research.  These articles are based on a recent study published by Greenwich Associates which showed that the market share for independent research providers fell from an 18% share in 2008 to 11% in 2009, or $845 million.  However, Integrity’s research shows that institutional investors spent considerably more than this on independent research in 2008 and 2009, thereby capturing close to twice the market share that Greenwich estimates.  The following is a detailed discussion of our research.

Different Consumers of Independent Research

According to our research, there are three main types of consumers of independent or alternative research.  Of course, the largest segment is the institutional investor which includes pension funds, mutual funds, hedge funds, and other institutional asset managers.  The next largest group is retail investors, and the smallest group is corporate issuers.  While some corporate purchase independent research for their own use, some of them also hire firms to write research on their companies to be distributed to retail or institutional investors (also called “paid for” research).

Overall U.S. Spending on Independent / Alternative Research

Based on Integrity’s extensive bottom up research, we estimate that the 763 independent research firms generated $2.03 billion in revenue in calendar year 2008.  Our analysts categorize each research firm we evaluate into one of six primary groups.  Consequently, we are able to determine the market share for each of these types of research.

 2008 Independent Research Market Share


As you can see from the chart above, 39% of 2008’s total $2.03 bln in revenue (or $795 mln) came from firms that primarily produced fundamental company research.  The second largest segment was economic research, which captured approximately 20% of the total (or $412 mln).  Primary research (which includes expert networks, channel checks, survey work, etc.) made up slightly more than 18% of the revenue, or $374 mln.  Specialized research – a category which includes numerous types of unique research including governance, patent, forensic, earnings quality, regulatory analysis, etc.  Firms in this segment generated $194 mln in revenue in 2008 (9.57% of the total).  Quantitative research firms garnered an 8% market share, or $169 mln in revenue.  Firms that primarily produce technical analysis of stocks (following the patterns of stock price and volume), captured slightly more than 4% of the overall spend on independent research ($87 million).

Of the $2.03 bln total spent on independent research in 2008, approximately $1.51 bln came from institutional investors, $350 mln came from retail investors, and $180 mln was generated from corporate issuers.  It must be noted that the approximate $90 mln in annual spending associated with the Global Research Analyst Settlement is reflected in the “Retail Investor” segment.  The bulk of this revenue is expected to drop off in 2009, and the remainder in 2010.

Based on Integrity’s analysis, sell-side side investment banks received $5.45 billion for the equity research they produced in 2008.  Consequently, the total amount spent by institutional investors on external research was $6.96 bln in 2008.  As a result, sell-side firms’ share of the research market was 78%, while independent research firms garnered 22% of the market.  
2009 Independent Research Forecast

Given the credit crisis, the stock market crash in the second half of 2008, and the impact these factors have had on the buy-side, we estimate that in aggregate, institutional investors are slashing their spending on external research in 2009, much as they have cut back on their own research staff.

Integrity’s estimates that overall independent research revenue will fall 18% from $2.03 bln in 2008 to $1.67 bln in 2009.  However, total purchases of independent research by institutional investors are projected to fall approximately 15% from $1.51 bln in 2008 to $1.28 bln in 2009. 

We expect that this weakness will not be experienced equally across all segments of the independent research industry, as investors sharply reduce their spending on fundamental and quantitative research, as well as technical analysis.  Conversely, we project that specialized, primary, and economic research will fare better as the buy-side finds more profitable insight in these types of research.    
Comparing Greenwich and Integrity Numbers

The first thing to note is that it has always been a little difficult to compare Integrity’s estimates with those made by Greenwich Associates.  One of the major reasons for this is one of timing.  Greenwich Associates 2008-2009 survey was just released covering the twelve month period ending February 2009.  Integrity, on the other hand, produces its estimates on a calendar year basis. 

But regardless of which Integrity forecast year we use as a comparison (2008 or 2009), it is clear that Greenwich Associates estimates a much smaller total for independent research than we do at Integrity Research.  Greenwich Associates estimates that institutional investors spent $845 million on third-party independent research for the 12 months which ended February, 2009.  Integrity, however, estimates that buy-side investors spent either $1.51 bln or $1.26 bln on independent research in calendar year 2008 or calendar year 2009, respectively – totals which are between 49% to 79% greater than Greenwich’s numbers.

As we mentioned in our Thursday blog, we suspect that part of the reason for the differences in our estimates are definitional, as Integrity has a broadly inclusive definition of independent or alternative research. For example, we would not be surprised if Greenwich doesn’t include primary, specialized, or economic research in their definition of independent research. 

However, we suspect that the real problem is based on trying to estimate the size of the research industry based solely on a survey like the one used by Greenwich Associates.  As we have discovered ourselves, most buy-side investors are not particularly good at accurately reporting how much they are spending on sell-side research (which is a bundled service) versus independent research (which is extremely broadly defined).  Ultimately the accuracy of their estimate is based on whether their survey participants agree with the definition of independent research, and if they actually know how much the firm is actually spending in bundled commissions, hard dollars, soft dollars and via CSAs on this form of research.   

Certainly, it is clear from the numerous buy-side clients we have worked with, institutional investors are spending hundreds of millions of dollars on a wide range of content from hundreds of boutique research firms.
The Bottom Line

We agree with Greenwich Associates that institutional investors are reigning in their spending on independent third-party research in 2009.  However, we sharply disagree with Greenwich’s sizing of the overall independent research industry, and we think Greenwich is dramatically underestimating the relative share that the buy-side is spending on independent research and overestimating what they are spending on sell-side research.


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  1. Sanford Bragg on

    From Pat Shea, Executive Director, Investorside Research Association, the trade association for independent research providers:

    One other reason I suspect Greenwich may have misread the market size of Independent Research is that they seem to look at it simply as: Bundled = non independent and Third Party = Independent.

    I noticed in one of last years reports that they didn’t categorize Sanford Bernstein as Independent, rather labeled them in the “Sellside” bracket. During Investorside’s Members Day conference last year there was a panel on trading headed by George Kledaras which discussed the trend of buyside firms trading away from the bulge bracket firms after the Bear and Lehman “lost commissions” episode. I suspect that firms like OTR, ISI and other independent firms with their own trading desks, have received more of their payments in bundled form versus 3rd party since then and that phenomenon has skewed the Greenwich’s numbers to overstate the non-independent market share.

  2. Sanford Bragg on

    From Richard Wallace, founder and CEO of Enzard Limited, which provides marketing and account management services to independent research companies in the Asia-Pacific region:

    In your blog, you state: “As we mentioned in our Thursday blog, we suspect that part of the reason for the differences in our estimates are definitional, as Integrity has a broadly inclusive definition of independent or alternative research. For example, we would not be surprised if Greenwich doesn’t include primary, specialized, or economic research in their definition of independent research.”

    Could the definitional difference lie in the fact that I think you include in your broad definition of “independent” any non-investment bank research, where as I (and maybe Greenwich?) only call independent those IRP’s who have no execution capability?

    Indeed, if Greenwich do use the same definition as we do, then I am still surprised at their figures – not surprised that the absolute spend has fallen, but surprised at the relative spend fall. I have certainly not seen any thing like the relative decline that Greenwich mention but I have seen a modest decline in spend, through a combination of cost cutting (some of which has been forced cutting by dying hedge funds!) and reduced commission flow. But then I presume they, and you, are just referring to US research (not US+non US research) so again we may be comparing apples to pears!

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