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The Price of Good Investment Research?

publication date: Nov 2, 2017
author/source: Brian Nelson, CFA

Photo credit: Phlebotomy TechThomas Haynie 

Skimping on research could cost you big when the you-know-what hits the fan. Research firms are reportedly charging as much as $5,000 per hour for one-on-one meetings with top analysts. Access to basic research is now being priced at $40,000 a year at some firms.

By Brian Nelson, CFA

There’s a lot happening in the investment research business these days. My good friends at Morningstar (MORN) were recently “called out” over concerns about the perception of their star ratings on mutual funds, other providers had been hosting promotional research on their website, and some of the top banks are completely doing away with their analyst staff as the competitive environment heats up. Many a charter holder may be beyond disappointed that the CFA Institute is not doing enough to differentiate the status of the CFA designation, too.

What’s more, the CFA Institute seems to be putting the concept of indexing in front of a lot of investors, overlooking the individual stock analysts in their constituency that are there to help investors make better decisions. It’s all somewhat confusing. I’m hearing horror stories of interviewers at hiring entities not knowing what the CFA charter is?!?! How can this be – some job candidates are saying: “if you can’t write an algorithm or spot a pattern in some random shapes – you won’t get a job now. Who cares that you’ve spent 900 hours+ getting the CFA Charter?”

It’s strange. Even the opening remarks at the 70th CFA Annual Conference in May 2017 were given by John C. Bogle, the founder of Vanguard. I’m just wondering how this is supposed to make chartered financial analysts feel, the ones that spend most of their working lives uncovering the difference between price and value in an effort to help investors? Nowadays, it seems like it matters more how many followers one may have on Twitter or how many likes you get on an article on Facebook. Have we lost our minds?

Is it possible that one might be more likely to receive a speaking engagement if you’re a commentator on a business show than one paving the way for new ways of looking at investing to help investors? Not only has it become increasingly more difficult to know who to trust out there, but I have become flabbergasted by what I’m reading on Twitter these days and other social media blogs, promoting the concept of “indexing at any price.” Is this even possible? I think the industry wants to talk active versus passive, but that is not the correct question to ask. It can’t ever be.

The correct question will always be: undervalued versus overvalued? Anyone that tells you different is selling you something. It is that simple. Logically, for example, indexing can be really good at 1 times forward earnings, but it could be really, really bad at 100,000 times earnings. The financial industry, not the structure of the financial industry, but the self-reinforcing circular reasoning that seems to be making its way to the forefront of social media is not healthy for the investor, nor is it healthy for the analyst that’s doing a tremendous amount of work dispelling myths.

I believe each and every individual should have access to high-quality research and analysis at an affordable price. I also don’t think that many investors know the going rate for one-on-one meetings with “star analysts.” Some investment banks plan to charge asset managers “up to $5,000 an hour” for access to the top analysts. This is in addition to fixed fees for annual access to their reports. Morgan Stanley (MS), for one, has been reported quoting a “small client $25,000 annually for five users for basic equity research access and five total hours of analyst time.” The going rate for private meetings with stock analysts at Morgan Stanley: $2,500 per hour. Here’s what others are reportedly doing:

UBS Group AG (UBS) is proposing to charge clients about $40,000 a year to access basic equity research, according to people with knowledge of the plan. Barclays Plc (BCS) is also pricing its read-only European research at about $40,000, while JPMorgan Chase & Co. (JPM) is suggesting as little as $10,000 a year, the lowest price to emerge so far for analysis of stocks, people with familiar with the pricing have said.

The reality is that the proliferation of research/opinions on the web and on social media has not made good research and analysis less valuable. Instead, it has made it more valuable as experienced readers pay up for the difference. Research and analysis is not a commodity. In some ways, it may be one of the most sought-after treasures the financial markets have. When indexers start pointing fingers at each other when the broader equity markets hit that inevitable rough patch, I’m not going to want to watch the fallout. I don’t want to see the ramifications. But where’s their research and analysis? Where’s their evidence – the stock market has gone up in the past, and it will in the future? Is that it? The stock market at the lowest cost? Really?

Boy – they could be in for some big trouble when the you-know-what hits the fan.

Securities Research: DNB, FDS, MCO, MORN, SPGI, TRI, VALU

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