20 Years On: Integrity Research Celebrates 20 years Tracking Research


This is the first of five-part series on the state of the investment research industry.

This year marks the second decade since Integrity Research’s founding in 2003, so it is only natural for us look back over the changes to the investment research industry since we started.  Looking back also helps us look forward, at least for a short distance.  Given what we’ve seen over the last twenty years, it’s anybody’s guess what things will look like in 2043…

Integrity Research was founded amid reforms instituted by the so-called Global Research Analyst Settlement, which sought to address conflicts of interest between investment banking and research.  The settlement was a 2002 enforcement action against ten US investment banks which mandated greater separation between research and investment banking.  In addition, $450 million of the fines levied against the ten banks was earmarked for independent research, with the intention of fostering greater reliance on research sources with no ties to investment banking.

Since there was little visibility about independent sources of research, Integrity Research jumped into the fray, seeking to help institutional investors (and others) find lesser-known sources of research.  The initial focus was on indie boutiques, but that soon broadened out to other types of research.  We were the first to focus on the growing expert network industry, which offers direct access to industry experts, lessening reliance on traditional security analysts.  We were also one of the first to notice the increasing reliance on what became known as alternative data, which is also transforming the way research is done.   

The research landscape has changed greatly over the last couple of decades.  We’ve seen four major regulatory initiatives which impacted research: Regulation Fair Disclosure which prohibits selective disclosure to security analysts and others (enacted just before Integrity was founded); the Global Research Analyst Settlement, the catalyst for our company; a barrage of prosecutions from 2010 to 2012 arising from the use of expert networks to gain inside information; and greater scrutiny of payments for research, culminating in the 2018 MiFID II research unbundling reforms.

Technology has played an even more major role in transforming research.  Gone are the sales traders, the high touch traders that leveraged research to gain trades, victims of the rise of electronic trading.  Research salespeople have not died out, but they are shadows of their former selves.  With the increased mechanization of research interactions, salespeople are more likely to be account managers acting as gatekeepers to research rather than research maestros delivering the most appropriate research to each client. 

Earnings notes are largely extinct as natural language processing extracts actionable insights in nanoseconds as earnings are released.  The proliferation of alternative data has forced analysts to become ‘quantamental’.  Python skills are now de rigueur for analysts, augmenting and perhaps supplanting Excel.  In sectors like consumer and technology, alternative data dominates valuation models.

Perhaps most transformative has been passive investing which has grown relentlessly over the last two decades.  Passive assets were barely over 10% of US fund assets when Integrity was founded, and now exceed active managed fund assets.  Passive investing is the scourge of investment research.  Passive vehicles require no research other than what little might be used to maintain indices.  Even more importantly, passive vehicles pressure active managers to reduce their costs, prompting ongoing declines in payments for research.  Research payments are less than half what they were over a decade ago.

And yet, despite all, investment research perseveres.  Big banks offer waterfront research coverage.  Mid-tier banks center on stocks closer to home.  Boutique banks hire analysts for their specialist sectors.  A few foolhardy analysts continue to go independent. 

The reality is that so long as there is investment banking, sell-side research is a given.  You can’t win a banking mandate without research coverage.  Banks such as Deutsche Bank which have shuttered their equities units continue to hire analysts for their bankers.  Research can have other constituencies such as wealth management, but banking is the ultimate driver for sell-side coverage.

In our next installment, we’ll begin to examine the change agents impacting investment research, starting with regulation. 


About Author

Sandy Bragg is a principal at Integrity Research Associates. He has over thirty years experience as an investment research professional. Prior to joining Integrity in 2006, he was an Executive Managing Director at Standard & Poors, managing S&P’s equity research business and fund information properties. Sandy has an MBA from New York University and BA from Williams College. Email: Sanford.Bragg@integrity-research.com

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