Category Archives: new rules

WSJ is wrong about the future of investment research

Very interesting article yesterday at the Wall Street Journal.  Entitled, “Stock-Research Reform to Die“, the article describes what’s happened in the wake of Eliot Spitzer’s landmark settlement against Wall Street brokers in 2003.

StockResearchUnderusedByRetailBrokerageAccording to the WSJ, this settlement was part of a wider Wall Street wrist-slap against ingrained culture that issued “overly optimistic stock research in order to win investment banking business.”

One of the results of the settlement required major brokerage houses to spend $460+ million on independent stock research for their clients.

The WSJ’s conclusion: six years later and almost no clients are using independent research.

At Credit Suisse, which has mostly institutional clients, the number of times retail clients accessed independent research from the firm’s Web site ranged from 16 during the third year of the settlement to 110 the first year.

At the old Salomon Smith Barney — now part of Morgan Stanley’s Morgan Stanley Smith Barney — its roughly 4 million retail households accessed about 12,000 reports each month. Less than 2% of Goldman Sachs Group Inc.’s Private Wealth Management clients likely downloaded a report each month, according to data from the public reports.

The WSJ mentions 3 reasons why investors haven’t taken up independent research at their broker:

  1. investors rely upon their brokers to act as a screen:  While 11% of brokers consumed independent research at least occasionally, they typically don’t send independent research out to clients.
  2. investors don’t rely as heavily on stock research today as they used to: “In the late 1990s, a positive report from a hot analyst could send a stock soaring. That effect is more muted today.”
  3. structural changes away from brokers to advisors: Commission-based business is old-school.  It’s been replaced by fee-based professionals acting as advisors.  There is less emphasis on trading at the retail level and less need for this type of research.  Combined with chinese walls going up between brokerage and investment banking, banks are cutting back on research teams as research becomes harder to monetize without the tie-in with banking.

Just wanted to chime in with a couple of comments:

  • I agree that full-service brokerage clients rely upon their brokers to act as screens.  That’s why they pay them and why they work with an advisor.  The vast majority of clients do not know how to read research or want to be bothered.  They want a quick synopsis why they should own a particular stock and for that, the broker acts as a type of well-heeled Cliffs Notes.
  • Maybe investors weren’t even aware that independent research was an option?  Do they know why it’s important?  Are investors aware of the biases which still exist in sell-side research?
  • Why depend on the guilt party to distribute the cure to the sickness?  That’s nuts.
  • Totally disagree with the fact that investors don’t rely on research. I would say that it’s more accurate to say that given historical conflicts of interests, investors no longer trust institutional research.  Given the gaping void left by Wall Street and the rise of financial bloggers and aggregation sites like SeekingAlpha,  many investors are actually consuming more research on more companies than ever.  We’re in a Renaissance/Gold Run/Bull Market for investment content — it’s institutional research that’s not finding its footing.
  • It’s hard for brokers today. Without an edge in research or asymmetrical information, it’s hard to push stocks and get paid for it.  That’s why many brokers have become mere wolves-in-sheeps-clothing: they’re still brokers but get paid as advisors.  We’re also seeing the emergence of true financial fiduciaries who work extremely hard for their fees and performance for clients, in up and down markets.   These advisors are doing real research or hiring people who do and they’re the ones consuming the research, not clients.
  • I think we’re seeing the investment field changing so quickly before our eyes.  On one hand, we’re seeing investors go boutique and sign up with independent financial advisors.  This is like more full-service than full-service.  On the other hand, we’re seeing investors retake the reins of their portfolios and managing things on their own — classic DIY investing online.  There is also a middle ground of investors who want more control but also want professional advice to support them along the way.  Regardless of the model, someone is consuming research, whether it’s the client or the advisor.
  • We need new business models to foster more independent research to fill the gap left by Wall St.’s void.  Tools to rate accuracy and trust-worthiness.  Performance.  From individual positions in a portfolio to the dynamics of portfolio management in general.

Interesting to see that most of the firms polled in the WSJ article were not planning on continuing distributing independent research.  Some have jettisoned research while others are bolstering their efforts.  That still leaves a tremendous opportunity out there for anyone who can provide actionable advice to the majority of investors out there.

Additional Resources


WSJ: Navigating online personal finance sites

I’m not particularly a fan of these Mainstream Media (MSM) overviews of Internet tools.  I find, more often than not, that they’re typically short on analysis and don’t help investors really navigate what’s really out there, why these tools are important, and how investors are successfully using them.

This short video piece (2:45) ran late last week on the Wall Street Journal’s website (sorry, couldn’t get the video to embed for some reason).  It’s a cursory overview of some sites focused on personal finance (Mint, Wesabe) with the perspective of more people wanting/needing to take control over their finances and investments in light of the recent financial tsunami.  The interviewee is Shelly Banjo, Dow Jones Newswire’s reporter on wealth management.

A couple of sites are mentioned explicitly.  Simplifi, a site that helps investors build their own financial plans, is mentioned as a good resource for do-it-yourself investors.   Covestor, a tool that allows investors to see what others are actually doing with their investment money, is cited as an important site “so you don’t have to take advice from some financial advisor trying to sell you something”.

Frustrating to see MSM’s  quick gloss-over of security and privacy issues.  When asked about security with some of these sites, Banjo responds, “It’s OK.  These sites have to be secure so people will use them.  So, they’re OK.”  In a way, she’s right.  No one would use these systems if there was a likelihood that his entire financial history and net worth made its way online.  Security is an important issue — I don’t think it’s enough to reason-away security issues.  Be sure to check security/privacy policies of any site you may consider using for online investing/personal finance.

Anyway, also check out Banjo’s “The Best Online Tools for Personal Finance” that ran in today’s WSJ.

Financial advisor finds profitable niche with social media


It’s still early days for financial advisors adopting social media.  There are compliance issues, structural issues and just questions as to the ROI.  There are a few early adopters investment advisors, though, who have seen the light and are not only using social media, but building their practices via new media.

EPIC Advisors and its Social Media strategy

Sean Hannon, founder and CEO of EPIC Advisors, is ahead of the game.  After cutting his teeth at Goldman Sachs and JP Morgan, he set out two years ago to found his own Registered Investment Adisory (RIA), EPIC Advisors.  I had a chance to speak with him today.

EPIC’s business

Sean’s firm has over 90 clients ranging from high-net worth individuals to families beginning to grow their retirement nest eggs.

  • Transparency: Sean believes in a uniquely competitive level of transparency and runs his business accordingly.
  • Communication: Communication is extremely important for him and he works hard to ensure that clients are never surprised by his activities.
  • Personalization: The RIA structure and the Separately Managed Account (SMA) provides many investment advisors with a scalable solution to servicing numerous clients.  The adviser manages a model portfolio which is replicated out in client accounts on a prorated basis.  Hannon works hard to overlay client-specific activities on top of his portfolio so that each client has a customized portfolio inline with their individual  objectives and circumstances.
  • Value add: While such transparency may be a double-edged sword,  he ensures that he provides real value at every step of the investment process.

3 Ways to Grow an RIA

How he’s building his business is a how-to guide for financial professionals looking to build their business beyond the boundaries of their traditional extents of influence (community, city, state and even country).

According to Hannon, he’s got a three pronged strategy to grow his assets: Continue reading

Learn the basics of Screening 2.0 by book

Giving thanks

Sometimes you just have to give thanks.  When you use something, it’s good practice to give credit to those behind the product’s creation.jennifer-anniston-give-thanks

I’ve been giving a successful seminar locally for about 1 1/2 years.  It’s very user-friendly in the sense that the topics we discuss are driven by the participants.  We’ve learned about investing in China, hedging strategies, asset allocation — a whole slew of things.

Ask the guru

We’re in the process of dissecting Guru Strategies, where we break down those strategies employed by guru investors of present and yore, investors like Warren Buffett, Peter Lynch, and Ken Fisher.

I’ve been basing a lot of our discussion around a strategy I call Screening 2.o, definitely one of our New Rules of Investing that will enable investors to make better, more profitable trades/investments in the future.

Screening 2.0 is all about the ability to easily screen stocks for criteria that the pros use.

Guru Screening vs. Piggyback Investing

On this blog, we’ve talked a lot about what I call Piggyback Investing.  Whereas Piggyback Investing involves cloning existing guru portfolios and creating your own all-star portfolio on the back of institutional investors, Screening 2.0 uses an algorithmic approach to screening for the same criteria other investors use in their investment processes and then picking stocks accordingly, even if these investors are no longer in the came.

It’s Alpha Clone vs. Validea.

Mebane Faber vs. John Reese.

Go to the source

Anyway, by far the best breakdown of these strategies comes in a recently published book, The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies.  I’d like to give thanks to the author John Reese and everyone at Validea for producing such a text, a text both novice and experienced investors can pull something out of.  It’s been a true source of learning for our investment group as we discuss the strategies and tactics of famed investors.

It works like this:

The book is structured into 4 parts:

  1. Value investing
  2. Growth investing
  3. Pure quants
  4. Putting theory to practice

In the first three sections, various gurus occupy their own chapters.  Drawing from extensive research, Reese introduces each guru investor (think, Dreman, Zweig) with a brief bio, successfully reduces their overarching tenets in investing (“Buy what you know” or “Invest in a company an idiot can understand”), and then provides actual mathematical formulas these successful investors used in their investing (so, PE<30 or PS<.75) as a way to implement these tenets.  In some cases, Reese and Co. update certain formulas to reflect more current conditions (as per, Benjamin Graham, per se) and in other cases, have to provide more clarity on certain criteria when the guru investor was more ambiguous in his writings.

Section 4 then provides 6 principles that Reese has culled from a variety of gurus.  These are rules that sit above each guru that only someone studying all these portfolios could posit.  Things like “Combining strategies to minimize risk and maximize returns”.  Think of these as the end-product of research that puts forth applied rules based upon the findings of monitoring these portfolios.

Reese is a successful entrepreneur whose exit from his own startup enabled him time to think about investing a windfall of cash.  Like any MIT and Harvard grad, he read everything available on the market related to investing (newsletters, magazines, books).  He liked the idea of focusing on those guru investment books that provide actual formulas and creating a computer system to screen for stocks that fit these criteria.  He’s been following the performance of many of these Screening 2.0 portfolios for years.  His book, The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies is the culmination of this research.

This blog post started out as a process in thanking someone for a valuable resource.  In an age of screen scraping, spam blogs (splogs) and pirated music, it’s good to give back sometimes to drivers of content we find valuable.

More resources:

Advisors, and registered reps, stepping up with custom marketing materials

We’ve taken the bent on this blog that content sells advisory services.  As competition for a shrinking asset base in the U.S. increases, creating custom content — ebooks, newsletters, etc. — can help you target your perfect customer with value-add from the beginning of the relationship.  By providing value and differentiation from step 1, a financial advisor or broker can immediately distinguish himself from his competition.  More than that, it also opens up various revenue channels — some old, some new, as well.

custom-publishingKristen McNamara writes extremely well for Dow Jones on the various business issues facing financial advisors.  A recent article, To Stand Out, Pitch Yourself, describes the evolution of the content-driven strategy that is now taking hold at the major wirehouses.

According to McNamara:

Some large brokerage firms, including Merrill Lynch & Co. (NYSE:MER) (MER) and Raymond James Financial Inc. (NYSE:RJF) (RJF), currently or will soon allow financial advisors to create their own custom marketing pieces.

This is an amazing development.  It’s a huge milestone that these large financial firms are permitting their advisors to create custom marketing materials in an onerous environment of compliance regulations.  It’s also incredible that these firms are actually providing resources to help their advisors create these so called, pitch books.

Again, from McNamara:

Merrill Lynch (NYSE:MER) , in response to advisor demand, is rolling out a new program to enable its advisors to create custom brochures highlighting their specific strengths and ability to harness the resources of the entire firm, says Steve Samuels, first vice president and director of global training and organizational design.

The program is in test-pilot mode due to the technology involved. Merrill expects to make it available to the firm’s full brokerage force in a matter of months, Samuels says.

I’m sure in the beginning of this process, these firms will merely approve numerous slides created in-house for inclusion in advisor materials.  It will take more time to develop the internal processes for approval of actual individual materials.  Regardless of timelines, though, this is the future of the New Rules of Investing — both advisors and investors locating each other and working together in new models.

Key to McNamara’s thesis is that success comes in this age by pitching capabilities, not products.  And even more, honing that pitch to the right prospect.  Says McNamara, “Investment products and service offerings vary little from firm to firm. What differentiates an advisor, and what many have difficulty conveying, is his or her ability to uncover and meet clients’ individual needs.”

This, dear reader, is the $1,000,000,000,000 question.  We’re just at the beginning of the race.

Additional Resouces

Twitter attracting new investment research products

Twitter certainly has gotten some great free press as of late, with Ashton Kutcher and Oprah all entering the fray.

All this excitement has not been lost on investors.  Traders have been using a service called StockTwits to trade breaking news, ideas, commentary and data on the broader stock market and individual stocks.  I like to use a Twitter client like TweetDeck to manage my Twitter experience.  It even has a built-in interface to StockTwits so I can monitor chatter around my portfolio.

upside-premiumIt’s great to see new investment products being rolled out for new platforms.  If investors are consuming information via Twitter, so why not?  So, while a group of early adopter investors are using Twitter to improve their trading, they now have a choice of 2 premium products to home their trading prowess.

Via an announcement today on the StockTwits blog, it was announced that StockTwits is marketing two subscription products produced by two outstanding memebers of the StockTwits community.  Investors can pay $50/month or $500/year for access.

One of the products is produced by Upsidetrader, a blog written by Joe Donohue, who was a hedge fund founder after a 13 year stint as a retail broker at Kidder Peabody, Smith Barney, Bear Stearns and Lehman Brothers.

According to Upsidetrader, you get the following with your subscription:

  • Weekly newsletter provides expert trading theses and pointed strategy for the coming week, as well as a detailed review of previous views; it is distributed during the weekend.
  • In addition, Joe will post charts 2-3 nights during the trading week, providing clear, actionable set ups.
  • Joe will educate you regarding his proprietary technical analysis system through the presentation of trades.
  • You will have direct access to Joe through the StockTwits community platform.

StockTwits Business Model

Here’s something interesting.  This new service is being delivered for a fee over Twitter and a 3rd party, namely, StockTwits is pocketing the profit.  Twitter doesn’t see any of it.

I assume StockTwits does the marketing and billing, the two analysts write and manage the research, and there is a revenue share between the parties.  Is this a new model, fee-based, Twitter-deliverd, investment research?

What do you think?

New Rules of Investing Top Links 4/19/2009

Social Media

  • Barron’s getting all atwittered (sub. required) over new apps used for trading.  Focusing on Twitter, this article illustrates how upstart brokerages like TradeKing and Zecco are incorporating social media into their trading platforms.  Read whole article here.
  • Media firms are struggling with the traditional advertising model.  All are considering extracting money directly from users/readers.  Read a great article from Laserlike about when is the right time to sell pageviews and when it’s best to move into the lead generation space.
  • Brian Hamburger and Daniel Bernstein of MarketCounsel, one of the nation’s leading business and regulatory compliance consulting firms, addressed the compliance responsibilities of advisors who use blogs (pdf), LinkedIn, Twitter, Facebook, and any other social networking medium. While advisors would be wise to take advantage of the new media to grow their businesses, they must be aware of and adhere to their regulatory responsibilities.

Personal Finance

  • Get a tax refund?  Yielding Wealth explores what to do with a tax refund and looks at socking it away for a rainy day vs. paying off debt vs. investing it vs. spending it.  Read the whole thing.

Global Investing

  • WSJ reports that China’s $200B sovereign wealth fund is gearing up to deploy capital and finding markets open to such investment in Europe that have previously shunned the China Investment Corp’s investment money.  Read the full story here.


  • The SEC has posted its compliance guide here (pdf) on its rules that require companies to submit financial statements in XBRL.
  • Is financial innovation hurting or helping the poor?  You make the call in this NYT article.  Read the whole thing.


  • Smith Barney is quickly losing advisors and client assets are flowing out of the new division of Morgan Stanley and Citigroup.  “If you see $40 billion dropping off the asset base in one quarter, that’s huge no matter what. They may be small producers, but a lot of small producers are with leaving with a lot of money.”  Read the article here.


  • B-school grads are looking beyond investment banking and beyond Wall Street in general.  The New York Times profiles some recent grads who are importing wine and becoming rabbis.  Read the whole article.