Last week the requirement for ten of the largest investment firms on Wall Street to buy independent research from three or more research firms and make it available to their main street clients, put in place by the SEC Global Research Settlement, expired. The SEC Global Research Settlement was implemented after regulators accused investment banks and analysts of releasing biased research that benefited the investment banking business. As a result, the firms agreed to pay $1.5 billion to restitute the damages caused by their deceitful research and create a wall between their investment banking and research. Part of this agreement required the firms to allocate $460 million for independent research. Through this, independent research became available to their retail clients. There has been a range of opinions on whether clients actually used the independent research required by the ruling and what will proceed in the aftermath of the settlement.
This past June the WSJ published an article titled Stock –Research Reform to Die where they concluded that the settlement had little if any effect on individual investors. The WSJ cites that in the third year of the settlement a mere 16 clients accessed independent research from Credit Suisse’s website and only as many as 110 reports were accessed in the first year. At the former Salomon Smith Barney, amongst approximately four million retail households only 12,000 reports were accessed each month. The WSJ attributed three main reasons to the minimal usage.
- First, clients have continued to depend on their stockbrokers for stock advice and thus few retail customers have sought out or know about the independent research available.
- Structural changes in Wall Street’s business models have deceased the demand for research. Brokers have moved from a commission- based business to serving as an investment advisor and collecting a yearly fee based on AUM.
- There has been a general decrease in stock research. Less than a decade ago a buy from a “hot analyst” could “send a stock soaring.” This does not exist today.
While there was minimal use from retail investors, internal usage did and continues to occur. According to Mark Fichtel, an independent consultant who helped select research for Lehman, from August 2005 to July 2006 approximately 11.5% of its brokers used independent research at least occasionally. The research however was not being sent out nor advertised to retail clients. The simple reason being, there was no incentive to. The same can be said for the other nine investment firms.
The exact numbers for which banks will continue to publish research are not known. Both Goldman Sachs and UBS AG have announced they will not continue to make independent research available to retail clients. Merrill and Morgan Stanley have confirmed that they will.
Interestingly, although not part of the settlement, a number of brokerage firms also began publishing independent research to retail clients; this was likely simply because of competitive reasons. And according to Financial Planning, many plan to continue to provide independent research. Fidelity Investments and TD-Ameritrade included. “In the current market environment, individuals are looking for ways to better inform their investing decisions, and independent stock research can provide the diverse information and viewpoints they need,” said Stephen Austin, spokesperson for Boston-based Fidelity Investments. TD-Ameritrade currently receive independent stock, fixed-income, options and ETF research from seven third-party providers and plan to continue. It will be interesting to see the advertising mechanisms that these firms will use to showcase their independent providers and what, if any competitve edge this will give them.