The wide spread fear prompted by the aggressive US government insider trading investigation over the past few years prompted a sharp downturn in the use of expert networks by buy-side investors. However, improved compliance controls and fewer cases involving expert networks have led to reduced concerns about their use – developments encouraging the roll out of two new expert networks in the past few weeks.
Background
In the wake of the U.S. government’s insider trading investigation over the past few years, and particularly the role that expert network provider Primary Global Research played in a number of these cases, buy-side investors became extremely nervous about their use of expert networks.
Consequently, many hedge funds and mutual funds limited or even stopped the use of these services altogether. This led to sharp revenue declines at most expert networks, with Integrity estimating that the industry saw an aggregate drop of 30% in revenue from the market peak in 2008. The result of this pull back saw many of the largest expert networks shed staff, while some of the smaller firms exited the business altogether.
However, some of the more forward thinking expert networks decided to refocus the marketing of their services outside the US financial services markets. This led a few firms to promote their services in other industries like technology or healthcare. Some expert networks decided to expand their businesses outside the US. Using these strategies, a few expert networks were actually able to rebuild their businesses to levels not seen since before the insider trading investigation took off.
Reduced U.S. Buy-Side Concerns
Concerns with the use of expert networks at US buy-side firms have slowly improved over the past few years, though they have not disappeared completely.
Part of the reason for the reduced concern has been a decrease in the number of insider trading cases involving expert networks over the past few years. In addition, many buy-side firms have become increasingly comfortable with the compliance controls they have put in place around their own use of expert networks. Also, a number of US expert networks have ramped up their own internal compliance controls around their services in response to the concerns of their buy-side clients and prospects.
Robert Khuzami, chief of the Securities and Exchange Commission’s enforcement unit between 2009 and 2012 was recently asked whether he expected more regulatory scrutiny of expert networks in the future. He commented on this issue in an interview with TheDeal.com.
“I think this is an example where the spotlight of law enforcement helped to clean up an industry. As a result of these prosecutions, those expert networks that crossed the line and used their companies to engage in insider trading are no longer in business. And also, hedge funds have imposed controls that make sure that their research analysts and traders do not, willingly or unwillingly, obtain inside information through these networks. These funds are conducting due diligence on the expert networks before they use them, making sure that the source of the information, and the information itself, is legitimate. They are asking for certifications to ensure that the expert network employee will not provide them with material nonpublic information. They are chaperoning the calls with expert networks, and taking other steps to make sure these networks are not being abused. So, it is a good example where law enforcement focuses on certain activity and it triggers steps by the industry to make sure abuses do not occur.”
For more of Mr. Khuzami’s comments from this interview on a wide range of topics, click on http://www.thedeal.com/content/regulatory/enforcer-in-chief-a-conversation-with-robert-khuzami.php.
Google Helpouts
Last week Google formally announced the release of its new expert network like service called Google Helpouts (https://helpouts.google.com/home). We wrote about this service previously.
This service provides clients the ability to connect with domain experts for consultations via video. These consultations can be free or paid. If their paid, clients must use Google Wallet, from which Google will collect a 20% commission for their role in setting up the consultation.
Helpouts sits on top of the Google+ Hangouts infrastructure. It’s a real-time video chat service and also allows screen sharing if desired and appropriate. Currently there are eight Helpouts categories:
- Art & Music
- Computers & Electronics
- Cooking
- Educations & Careers
- Fashion & Beauty
- Fitness & Nutrition
- Health
- Home & Garden
Two of the key features of the service is that Google says that all Helpouts experts are included on the platform by invitation only, and that it screens all experts it offers to clients.
“People offering help through Helpouts can be large, medium, or small companies as well as individuals. We call them Helpout providers. They were invited by Google to participate and had to pass our screening process to qualify as a Helpout provider. Providers create and maintain listings that explain what they offer, their qualifications, their prices, and their schedules. You can find the help you need by searching Helpouts, by browsing our categories, or through direct links on the web.”
As we have said in previous blog posts (http://www.integrity-research.com/cms/2013/08/27/google-plans-expert-network-launch/), the Google Helpouts service does not offer a serious compliance platform that would be appropriate for buy-side investors. As a result, we have to conclude that this new service is meant for the mass market or even corporate users, and not for main stream professional investors. However, we would not be surprised if small start-up asset managers didn’t use the service in the early days as they scale their businesses.
So, will the improved climate around the use of expert networks help Google succeed where it has failed twice before with Google Answers and Knol? It is too early to tell, but we have to give it to them for their persistence.
Dowhower’s Acumen Alpha
We suspect that the second new entrant into the expert network space called Acumen Alpha, is a more serious contender for buy-side customers. Acumen Alpha is a new service developed by Dowhower, a global provider of due diligence, business intelligence advisory, and investigation services for the hedge funds, private equity firms, and corporations.
Acumen Alpha (www.acumenalpha.com) purports to have a network of 176,000 industry experts and professionals. The firms marketing explains that their experts and professionals include some of the top professors within their field of expertise, industry leading executives, physicians and medical professionals, and top minds in mathematics and quantitative fields and encompass professionals across technology, finance, accounting, law, marketing, and human resource fields.
The new service provides clients with one-on-one telephone consultations, live meetings, research products, and industry focused surveys and polls. The firm also says that it provides a compliance framework that “enforces and respects each client’s unique compliance requirement”. However, at this time Integrity Research has not been able to learn much about Acumen Alpha’s compliance controls and how it stacks up against other serious players in the industry.
From the press release and website, it is clear to us that Dowhower is trying to position Acumen Alpha as a direct competitor of firms like Gerson Lehrman Group, Guidepoint Global, and Coleman Research in serving the institutional investor community. In our mind, the firm will need to address a number of issues, including the strength of its compliance platform, before it will be a serious challenger to the large incumbents in the space.
Summary
What is becoming increasingly clear to the team at Integrity Research is that the market environment for expert networks is gradually improving, both outside and inside the US. This is one reason we suspect that both Google and Dowhower decided to release their new expert network offerings in recent weeks.
However, we are also convinced that the barriers to success in the business have gotten much higher in the past few years as compliance concerns have moved to the forefront. As a result, we are not convinced how well either of these two new offerings will fare with US hedge fund or mutual fund clients.
The real issue is whether these new offerings can provide something truly unique while also addressing the specific fears and concerns of the marketplace. We are interested in learning how both these firms intend to accomplish this. Until then stay tuned.