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| Opportunities & Exposures: Finance |
Independent Minded
By Jonathan Boersma, CFA
10/01/2005
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One of the unintended consequences of the global
settlement was the general downsizing of the research departments at many of the
large sell-side firms—which has led to fewer analysts covering fewer companies
and not enough hiring at independent firms to compensate. As a result, many
small- to midsize companies have lost analyst coverage to the point that
approximately 35 percent of all U.S. public companies are without any research
coverage at all. Some of these Wall Street orphans have hired analysts directly
to issue reports, resulting in clear conflicts of interest.
Also, investors
should be aware that the global settlement only addressed conflicts of interests
pertaining to equity research. The same types of conflicts also exist in the
fixed income markets. Because the disclosures required by the global settlement
do not carry over to the fixed income sector, investors need to be keenly aware
of any potential conflicts that may exist in those markets.
The global
settlement has changed the nature of the investment research industry for both
the long and short terms, but we continue to wonder if investors will truly
place a premium on independent research. Independence alone does not guarantee
high-quality research, which is a function of the analysts’ own capabilities.
But a prerequisite for quality research is a thorough and reasonable analysis,
which is usually impossible when an analyst is subject to pressures or to the
possibility of personal gain from his recommendations.
 | Jonathan Boersma is director
of standards of practice at the CFA Centre
for Financial Market Integrity in Charlottesville, Va. |
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