What if more sell-side research goes independent?

By Dominic Jones

THE Economist looks at the seemingly perilous plight of traditional broker research and concludes that the sell-side is far from dead, but the industry may drift from the big investment banks to independent research shops.

Their prediction is based on the supposition that fund managers, which have increasingly been building their own research departments and decoupling research costs from trading commissions, will continue to look for good third-party research to obtain fresh ideas and specific expertise. See Research in commotion for more.

If the Economist is right and independent research starts to play a more important role, what impact might that have on how investor relations professionals do their jobs? Here are few thoughts that sprang to mind as I thought about the potential implications:

• IR departments will have to become better at analyst relations. Not returning calls immediately because you don’t know the name of the firm that’s calling is never a good idea, but it will be even more dicey if independent research shops start springing up all over the place. Also, IR departments will need to develop policies that ensure fair access to independent research outfits and the traditional sell- and buy-side analysts.
• It will be important to know who independent analysts’ clients are. It’s fair to say that independent analysts are likely to be influential with their fund firm clients. Their clients are paying directly for the research so they are more likely to take it seriously. So when someone calls from a company you’ve never heard of, it will be extremely valuable to know who buys their research. Problem is, independent researchers are unlikely to disclose who their clients are for competitive reasons. Many of them could be hedge funds. Targeting will become more difficult as a result.
• Research could get much better. Usually only the most experienced, brightest and independent-minded analysts will survive, especially in investment research where it’s easy for customers to tell if your product adds value. Expect independent analysts to be much more informed, much less tolerant of vague information and much more pointed in their questions. In some cases, they may know more about your business than your CEO.
• Smaller companies could get more coverage. Independent analysts are more likely to look for investment ideas in areas of the market that others ignore. This could be a boon for smaller companies that complain of not having enough research coverage. On the flip side, it could also lead to fewer analysts covering larger, heavily-traded companies.
  
• The Web is likely to become even more important. For productivity reasons, independent analysts are likely to rely heavily on the Web for their research and communications. IR departments will need to ensure they are providing the information analysts are looking for in the formats and on the platforms analysts find most convenient. They also should be familiar with what information about their company is available on the Internet. Independent analysts are also likely to use the Web to market their own services and some may take advantage of free blogging tools and distribution networks such as Seeking Alpha to raise their profile.
• IR departments will need more resources. Dealing with a potentially larger and more diverse analyst audience, and needing to use the Web pro-actively and with precision, could stretch small IR departments. Add to this the increasing internationalization of capital markets, which NYSE-Euronext CEO John Thain spoke about recently, and the case for greater resources becomes obvious.

What do you think? How might a shift from traditional broker research to independent research impact how investor relations is done?

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