Paid Research You Can Trust?


Wall Street's canyons have always harbored research outfits that would write stock reports for a fee. These reports typically resemble those of sell-side brokerage houses -- not least becaue they're almost always positive. But since the company being covered was usually the one paying for the research, investors have mostly ignored the reports as the work of biased stock promoters.

Now, a joint venture between Nasdaq and Reuters (RTRSY), called the Independent Research Network (IRN), hopes to overhaul that sorry image and create a new model for issuer-paid research that will be both objective and highly credible. It could prove an uphill battle.

IRN's plan is to act as a middleman -- matching undercovered companies that are willing to pay with independent analysts who need the work. Daniel Blank, IRN's president, spoke recently with BusinessWeek Online Senior Writer Amey Stone about how the new model will work and why he believes there's strong demand from companies and analysts for this service. The following are edited excerpts from their conversation:

What's the idea behind the International Research Network?

IRN is an intermediary between corporate issuers and independent research providers. It is filling a void where there is a serious lack of coverage for mostly mid- and small-cap companies. Currently, half of all public companies have two or fewer analysts, and 35% have no analyst coverage.

How will the mechanics of the business work?

The issuer, who will pay us, is the catalyst for coverage. We will then turn to our Research Independence Council; we're in the process of recruiting members now. The council, which will operate sort of like a board of directors, will select the analysts that will cover the company. There will be three research firms for each company, and we don't allow the company to choose their providers.

What will you do if a company and an analyst get in a dispute?

There will be codes of conduct for both analysts and issuers and either side can bring any dispute to the council. The council can deselect a provider, but it would have to be on very solid grounds. We expect that there could be differences of opinion, which is why an independent, credentialed panel that can look at the situation fairly and make decisions will be so important.

How will analysts and companies get hooked up?

One of the first jobs of the council will be to create the selection criteria for matching an analyst with a company. The council will also conduct ongoing performance measurement of research providers. Long-term, if someone is persistently wrong and inaccurate, they could be deselected. But disagreement is not grounds for deselection.

How much will the service cost?

That is something we're still working out. A number that has been discussed is approximately $100,000 a year for a three-year commitment. It's not something a company will enter into lightly. Research is expensive.

How will the research be distributed?

Reuters will distribute the research and we will be looking for a lot of additional distribution arms. It's very likely the research will reach Internet portals and major financial distribution platforms.

Will investors have to pay to access the research?

It's not part of our model to sell the information.

Have any companies signed on yet?

We've been talking to a lot of issuers, but we're not soliciting them at the moment. We want to be closer to launch before we get into sales mode. We expect to start signing people up in the fourth quarter.

What about the analysts? Have they signed on yet?

We've gotten a flood of calls from research firms that are extremely interested in participating. We also think this might spark a lot of former analysts to become independent research providers. Many independent analysts would love to cover more companies, but they have no certain way of getting paid. With this model, the issuer gets coverage and the research provider gets a new way of doing business.

Will there be a problem with analysts participating if they are already providing independent research to investors as part of New York Attorney General Eliot Spitzer's settlement with Wall Street firms? (see BW Online, 5/5/05,"Still Outside Looking In")

We've had conversations with a lot of the settlement providers, and we're hopeful that they will be able to participate. It has to do with how regulators interpret the terms of the global research settlement. It will probably be sorted out in the near term. It doesn't jeopardize a lot of the providers we're talking to.

A competitor, the National Research Exchange, is trying to do something similar in providing unbiased, company-paid research. Is there room for two firms in this business?

There are some differences in our model. We're placing a lot of emphasis on mitigating conflicts of interest. We want to make this an acceptable model for getting research coverage. That's why we have the independent council and why the issuers don't get to choose their providers.

Do you think you'll be able to avoid the bad rap paid research has gotten in the past?

In the past, people didn't really take paid-for research seriously. But this is a case where a middleman is necessary to make sure the research product has quality and integrity. Plus, we have two extremely strong brands behind us -- Nasdaq and Reuters, which are both known for integrity and self-regulation.

There is performance measurement and there is long-term commitment, which give the research provider freedom to be honest and rigorous in their coverage. These are not going to be all buy recommendations, and issuers will understand that. Really, the only similarity we will have with paid research is where the funding will come from.


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