It appears as if Smith Barney is preparing to leave the Citigroup umbrella and join Morgan Stanley as troubled Citigroup looks to unload assets and raise capital. Over 9 million investment accounts and over $1 trillion in assets look ready to join Morgan’s extensive brokerage operations. As more and more consolidation occurs in the investment research community, there is going to be a gaping void felt by retail investors worldwide.
Morgan Stanley's CEO John Mack
Historically, investment banks were the engines of equity research. Research worked for investment banks even though the research was given away freely to account holders. Investment banks were essential in demand creation for equities and research paid for itself many times over via investment banking fees from the issuing companies. With investment banks clinging to one another for dear life in order to shore up their own balance sheets, the research industry is undergoing a sea-change.
I’ve spoken previously about the opportunity for New Rules type companies to step in and fill the void. Expert communities, crowd sourcing and piggyback investing will all continue to gain prominence in the investing ecosystem in years to come. IR firms who “get it” will play a valuable role for investors and firms trying to get their story out.
As the research game field changes, Roger Ehrenberg thinks the name of the game is disaggregation and specialization:
The difference between how it used to work and how it will work in the future is the disaggregation of Equity Research. The major securities houses will have global distribution platforms for connecting issuers and investors, and to provide markets on a worldwide basis. There will be relatively few of these players as the cost of maintaining a global distribution platform is huge and, in my opinion, a natural oligopoly. But research will be “open sourced,” as the charade sometimes called “Wall Street single-stock research” is finally exposed.
Having the securities underwriter issue a “puff piece” as part of the IPO selling process is a waste of time, money and is fraught with conflicts. The Global Settlement was just that – a settlement. It wasn’t a solution. There only reason for bulge bracket firms to pay for costly research operations is if they help Investment Banking land deals. Bulge bracket research budgets in the early 2000s were in the $500 million to $1 billion+ range. If one were to disaggregate commissions into payment for research and execution, it is safe to say that investors attributed little value to Wall Street research. So how did the gap get filled? Investment banking mandates, together with outsized commissions on “hot” IPO deals that precipitated the Global Settlement in the first place. Transparency will enter the research venue, where investors buy research from the best providers at a known cost. There is no reason why a securities dealer should have better research than anyone else, and given that this is not their area of specialization it isn’t clear that they should be in this business at all. Added complexity is almost always a bad thing, and securities dealers have enough to manage without operating a separate research arm.
