KUHN CAPITAL Wednesday, December 13, 2017
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Reporters as Analysts

12/10/02

Investment Dealers Digest reports that several financial trade publishers -- TheStreet.com, Reuters and Dow Jones, publisher of the Wall Street Journal -- are staffing up on analysts who will provide information and investment recomendations on public companies like that provided by investment banks.

The publishers are attempting to fill a perceived vaccuum created by the widely-publicized conflicts of interest that have resulted in such scandals as that most spectacularly perpetuated by Jack Grubman, former analyst at Salomon Smith Barney, who alegedly sold investors down the river on AT&T stock in exchange for his children's admission to an exclusive Manhattan nursery school.

While IDD's article worries about whether publisher's analysts might be exposed to the same conflicts of interest as are present at investment banks, we doubt that this concern is the greatest obstacle. Instead, we believe the real challenge lies in the details of the emerging business model. To be plain, how will publishers make money doing this?

The problem is that the current model absorbs the huge costs of supporting top-flight analysts by folding them into lucrative invstment banking relationships. There would be only three ways for an independent effort to make a margin:

1) Educate the consumer of analyst products to pay more for their supposedly independent perspective. That leaves the question, how much is an independent perspective worth?

2) Reduce costs by standardizing ratings like Morningstar does with mutual funds. But doing this will strip the best reports of the rich text that delivers valuable context and skilled observation.

3) Obsolete the "star" analyst. But can publishers attract the talent to do the job at lower salaries? As long as investment banks are willing pay up to $1 million to outstanding analysts, how can Dow Jones compete?

We're sure the publishers will tinker with all three variables -- lower analyst compensation, higher stand-alone product pricing, and lower production costs through standardization.

Meanwhile, several accomplished Wall Street executives have founded Soliel Securities, a hybrid model that attempts to finess the independence problem by contracting for research on behalf of its buy-side clients. Soliel would permit these clients to select from its list of mulltiple independent research sources, then pass some portion of its brokerage fees to the selected research house as compensation.

We watch with fascination whether this and the other entrepreneurial initiatives underway will succeed.


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