The research used by fund managers is almost always paid for by investors, through the commissions they generate when executing trades with investment banks. The sums involved are substantial. One estimate is that investors are paying $20 billion a year for research.
Yet the conflicts of interest at investment banks are obvious. They have every incentive to publish research which suits their corporate finance business or trading positions or which generates further transactional activity. Fund managers themselves have an interest in placing execution business with investment banks that offer them stock allocations or corporate access as well as research. Which may or may not be valuable. This was why the investigation by former New York attorney general Elliot Spitzer in In the US, the global settlement negotiated by Elliott Spitzer in the wake of the deflation of the TMT bubble in 2001 included provisions to subsidise the development of independent research. It was also why the Myners Review, published in the United Kingdom in 2001, favoured the “unbundling” of research from the payment of commissions for equity execution. This environment has made it hard for independent research providers to compete, since they have to charge for their work and cannot cross-subsidise their research from other activities. The net result is a worrying level of distortion in investment allocation and stock selection. Yet investors are a lot less concerned about this than they should be, according to Peter Allen, at the European Association of Independent Research Providers (Euro IRP). To read the full article and interview with Peter Allen, click here.
4th September 2013