Merrill Lynch Research Delusions


New York, NY – Last week we published a memorandum written by Merrill Lynch’s Director of Research, Candace Browning regarding their new research distribution strategy, developed to minimize the “napsterization” of their investment research services.  As you might expect, the team at Integrity has received countless comments, both supporting and countering Ms. Browning’s memo.

The following article, is one of the latter, written by Kris Tuttle, editor of Research 2.0 ( — a blog aimed at providing research coverage of emerging software technology today and create a team of great people who will provide similar coverage across a variety of technology areas in the future.  Kris is well known in the research business as he has 27 years of experience in technology, business and investing across a variety of domains: as a Director of Research at SoundView Technology Group and Adams Harkness & Hill, a Vice President of Institutional Sales at S.G. Warburg in NYC, an executive for 8 years at IBM, a AI researcher for 3 years at Carnegie Mellon and several jobs with start-up companies during the early years of micro-computing.


On March 22nd the Merrill Director of Equity Research, Candace Browning,  penned a memo regarding the state of equity research and some strong actions Merrill is taking to protect the value of their research product for clients. Having been there and done that at one time it certainly made us chuckle.   Beyond humor value I wonder if their actions to try and restrict access will work at all and if it signals any sort of coming shift in the economics of the business. The memo itself shows a remarkable lack of awareness of the business today as well as misstatements about how healthy it is.

It starts out in a surprised tone regarding the fact that Merrill research is broadly available to the public just after it comes out.   How can you be shocked by this?  It’s been a fact in the business for at least five years and has spawned many unsuccessful efforts to stem it.  In fact most of the client value delivered by sell-side brokerage analysts comes via their verbal dialog, voicemails, conferences and management access rather than published research and ratings changes.

Still Merrill states their are going to terminate research access by non-clients, increase access restrictions and delays for media access, eliminate licensing agreements unless they can be done at higher, non-eroding prices (whatever those may be.)   It’s odd seeing this from Merrill since the one obvious value their research has over others is it’s broad reach (no matter the content) and the fact that many institutional and retail brokers rely on it. Taking that away leaves little, if anything, of value.  This as opposed to some of the other banks which have indeed improved and created some true value-add in their research content.

The other part of the memo is just misinformed over the perceived value of street research.   The claim that recommendations produced a global return of 19.5% versus 16.2% for the MSCI is empty given way changes are effectively backdated and not measured by actual stock transactions.  Citing 42% total commission allocation to high-quality sell-side ideas (Greenwich Associates) doesn’t translate into anything meaningful for Merrill since they are a liquidty provider rather than an idea shop like Piper Jaffray, American Technology Research, or Majestic Research.

Lastly nothing that hedge funds allocate a great percentage (55%) of their commissions to research has more to do with them spending on special providers (Gerson-Lehrman), consultants and industry research groups rather than the street.  New providers of investment research services like Monitor110 will garner more of these research dollars in the future.

Having been there and done that I understand the need to try and trumpet the value of sell-side research and make people think they need to pay up for it.  Of course it rings absurdly hollow this many years into the decline and coming from Merrill lacks any credibility.  Merrill has been working to reduce their research costs for years and views it as a pure cost center.  Merrill analysts are measured on market capitalization under coverage rather than ideas and spend the bulk of their time fielding calls from sales, marketing themselves to clients to get votes and dealing wtih the kafka-esqe legal and compliance systems part of broker-dealer operations today.

Does the memo signal anything new for the broker-dealer research industry?  If so I’d love to hear about it!

Comment by Bill George:
I also found the (3/23/07) article on the Integrity Research Associate’s – ResearchWatch website about Merrill Lynch’s new Research Distribution Policy very interesting on several levels.

After reading Ms. Browning’s comments I wrote an email to several of my industry friends and acquaintences discussing some of what I thought were important points in Ms. Browning’s letter. The text of that email follows:

For one thing it seems Merrill Lynch’s Candace Browning is, to some degree, breaking ranks with the traditional claims by most full-service brokers that it’s impossible to separate the costs of research from the costs of execution. By quoting published reports on surveys about advisor’s brokerage commission allocation to “research costs” and specifically to “high quality sell-side research” she is raising the question, again, about the ability to separate research costs from execution costs and the costs of other brokerage ‘services’. The full-service brokerage industry has always claimed this is an impossible accounting task, now a representative of the industry is quoting surveys reporting these costs. Can they have it both ways?

Be that as it may, I believe the surveys Ms. Browning quotes generally underestimate what institutional investment advisors spend on research. Such under-reporting is caused, partially, by a reluctance to admit what portion of institutional clients’ commissions is spent on ‘research’ & other services, and partially because some commenters really don’t know how much of their clients’ brokerage commissions they are spending for other brokerage services above the costs of execution. It seems safe to assume that if institutional executions can be accomplished at an average of 1.5 cents per-share advisors who are paying 5 cents per share are paying three and a half cents per share for other service including ‘research’. That means that about 66.66% of the commission pays for research and other unidentified non-execution related services.

Another interesting point that Ms. Browning’s statement brings to mind, she says, “The educational value and investment recommendations produced by those analysts is not only broad, it is exceedingly valuable: Last year, our recommendations produced a total global return (calculated in local currency) of 19.5% versus the MSCI’s 16.2%.” This statement ignores the fact that it’s one thing to calculate an expected return from the instant one announces a investment recommendations, it’s quite another thing to implement the recommendations and achieve that rate of return in an actual investment strategy. I would not dispute her claim about the educational value of Merrill Lynch’s analyst recommendations; “educational value” is far too subjective to debate.


Last week Candace Browning, Merrill, Lynch’s SVP and Head of Global Research and Economics released a statement indicting those who redistribute the proprietary research produced by analysts at Merrill Lynch. At first I was suckered by Ms. Browning’s indignation at the ‘napsterization” of Merrill’s proprietary reports and their re-publication on information redistributors websites. But after thinking about her statement for a few hours I began to realize how really odd Ms. Browning’s statement is. . . .

Until recently it seemed that full-service brokerage firms encouraged the unrestrained redistribution of their “analytic” work as rapidly as they could pump it out the door. It seemed they realized that the redistribution of their analytic “noise” worked very positive magic on the investment banking and retail sides of their business. Of course, institutional investors have long recognized that the rapid duplication and redistribution of “street” research has been one of its significant weaknesses, and institutional investors have also recognized that another of the significant weaknesses of “street” research has been its potential for bias and conflicts created by the investment banking and marketing strategies at full-service brokerage firms.

Ms Browning’s sudden indignation at the “improper” redistribution of Merrill Lynch’s investment research seems even more peculiar if you look back at recent history. Just in case anyone needs a “refresher” on recent history, the following link below will take you to The Testimony of Chairman of The SEC William Donaldson’s Concerning The Global Analyst Research Settlement, Before the Senate Committee on Banking, Housing and Urban Affairs.
(In the testimony, you may want to skip down to item “II. Background”). In this context it seems Ms. Browning and others at Merrill should be pleased their research has any following.


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