An Interview With Dick Jenrette: Research Needs to Return To Its Core Values (Part 1)


The following is a guest article from Tom Leddy, former head of research product marketing for Donaldson Lufkin Jenrette, Credit Suisse and JP Morgan.  Leddy recently partnered with Integrity Research to deepen our expertise in research marketing and product development.

As the date for MiFID implementation in Europe moves closer and clarity in its impact becomes clearer, the focus of research attention has once again centered on the question of unbundling, transparency and pricing.  While the overall effects and actual adoption is analyzed given the proximity to its implementation in the UK in early 2017, the burning question among many in the US involves the degree and influence that new paradigm will have in the US research community.

Ultimate focus on research value

No matter what the eventual outcome, the pressure on pricing, transparency and the actual utility of the research, is likely to grow, especially as the regulations tighten on trading and commission pools as a method of payment.  Research managers are asking the question of “what if”, should the payment structure that is operational now for research be meaningfully altered and/or the client be forced to specifically value each piece of research used and pay for it independently.

It would appear no one is immune from the ripple effect of changes underway. While institutional bracketing as a means to judge proper payment to sell side suppliers and buy side users may continue, it may not be in the same way as before.  Hence, the likelihood for a continued pencil sharpening as institutions struggle to identify what is critical and at what price.

All of this controversy over the value of research indicates that the client consumers will move even more towards paying only for what they truly need and only for what they consider the best among the myriad of research providers. That may suggest the pool of potential payout will shrink even more as users struggle to return to the original benchmark of research being a valuable commodity, especially as it contributes directly to better performance and better decisions on the part of clients. It is our belief that the purpose and necessity for truly high quality research will remain one of the most likely survivors and perhaps even beneficiaries of this move.

The origins of institutional research

Today’s environment echoes much of the original backdrop for the birth of differentiated, high quality research as a valuable commodity for investors. The concept of top flight analysts as valuable assets and the opportunity to fill a hole and missing part in the market in the late 1950’s spawned the birth of perhaps the greatest name in the research business, Donaldson Lufkin and Jenrette (DLJ).

The firm burst on the scene in the late 1950’s, as three Harvard MBAs saw a chance to make a difference. To get the true flavor and sense of the time, we interviewed Richard H. Jenrette, one of DLJ’s three founders who became the Chairman and ultimately helped drive a spectacular ride for the firm as he became its most identified face.

During our interview, Mr. Jenrette argued that, prior to DLJ’s launch, research was a mediocre offering which provided little in the way of money making ideas. In order to fill that void, DLJ came up with idea of hiring top-flight analysts who would ultimately become the crown jewels of the operation.

DLJ sought to follow the underfollowed.  Many were smaller companies where DLJ analysts could identify great opportunities early on and offer unique money making potential that was truly unavailable from anyone else at that time.

The “The House That Research Built” best described DLJ’s essence and became its brand.  In the beginning analysts were not assigned to sectors, but to individual names where they felt they could pinpoint undiscovered opportunity that represented inefficiency in the market. At that time, unlike today’s Reg FD environment, analysts could talk directly to the management and assess growth prospects, qualities and opportunities first hand.  Mr. Jenrette considers it a loss that there are so many barriers to firsthand knowledge and that many CEOs now are afraid to talk to analysts for fear of breaking the rules and regulations put in place.

Victim of its early success

In picking companies with great futures, DLJ became the lead broker for many smaller growth companies where companies were eager to have the visibility and sponsorship a good analyst could provide if he sought to write on them.  In fact, it was a great way to reach the investors those up and coming companies needed so desperately for support.

DLJ also was instrumental in the development of “upstairs markets” and block trading to accommodate these new market darlings where the share count might be thinner and the need to have a block trading effort was born. One other interesting fact: salespeople didn’t exist early on as analysts were jacks of all trades and passed orders on to traders.

Also during that period, Jenrette and others discovered that commissions to pay for the information they were provided often came from a pool generated from trading the stocks of larger companies that the institutions were invested in.  In many cases the smaller names DLJ was recommending could not generate enough while there was an overabundance of commissions among the larger names that could be journaled to a research provider like Donaldson.

When DLJ went public in 1970, it had to make its profitability known, showing an ROI of 100 percent and margins of 50 percent.  As a result, regulatory pressure to eliminate fixed commissions increased, triggering the origination of negotiated rates.  Unfortunately the combination of negotiated commission rates combined with a bear market meant that DLJ had to fight to stay in the game.

The interview will conclude in the second installment covering DLJ’s resurgence, how it leveraged research into other business lines, and lessons for today.


About Author

Tom Leddy has pioneered and designed products that enhance and focus the research offerings of several major firms, providing clients with the means to better utilize and identify their value. He was Managing Director, Founder and Head of Global Product Marketing for research industry pioneer Donaldson Lufkin Jenrette and held a similar role for Credit Suisse after its acquisition of DLJ. He was Managing Director, Head of Product Marketing for JP Morgan before starting up his independent consulting firm, Tom Leddy Consults. He partnered with Integrity Research in August 2016.

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