From the December 2004 issue of Entrepreneur

Independent's Day

As part of last year's settlement with securities regulators, some of the nation's largest investment firms-including Citigroup, Merrill Lynch and Morgan Stanley-must now provide their clients with an independent source of research in addition to their own analysts' reports. Investors can obtain these reports from their brokerage firm's website or by dialing a toll-free number-and, according to a new study, they should.

Historically, independent research firms have been markedly better stock pickers than analysts at investment banks-particularly when the market is performing poorly, according to a recent stock performance report by university researchers. "The buy recommendations of independent research firms exceeded those of investment banks by 8 percent a year," notes Brett Trueman, a UCLA professor of accounting who co-authored the study with Brad Barber of the University of California, Davis, and Reuven Lehavy of the University of Michigan, Ann Arbor. "And during the bear market of 2000 to 2003, investment banks fared even worse on buy recommendations-underperforming independent research firms by 17 percent on an annual basis."

These findings are consistent with the allegations about conflicts of interest that led to the settlement, which suggested investment banking analysts were reluctant to downgrade their stock picks as a result of their firms' financial ties to the corporations in question. While investment banks named in the settlement must now adopt new safeguards to discourage biased ratings by their analysts, Trueman urges investors to consult more than one source-and preferably at least one independent research firm-when making investment decisions.

Save It for Later

In theory, your employees probably know it's essential to save for retirement. So in practice, why do so many fail to participate fully in their 401(k) retirement plans? "People tend to think they should save for retirement, but they put it off," says Shlomo Benartzi, an associate professor of accounting at UCLA's Anderson School of Management. "It's very hard for people to deal with their [take-home] pay going down."

In fact, studies show more than one-third of eligible workers fail to participate at all, and many more fail to participate fully. Yet there are ways employers can bring more workers into plans-and ease the pain of the impact on pay, says Benartzi, who notes that participation rates tend to be significantly higher at companies that automatically enroll employees and allow them to opt out of programs, rather than requiring them to opt in.

Benartzi teamed up with Richard Thaler, a professor of economics and behavioral science at The University of Chicago Graduate School of Business, to create a program that helps employees ratchet up their contributions over time.

"Basically, the employer asks people if they would like to use their pay raises toward retirement savings, and if they say yes-which most do-a portion of each increase will automatically go toward the employee's retirement savings until the participation reaches the federal maximum," he explains. "Employees can still change their minds after that, but most don't."


In 2003, informal investors provided more than
$100
billion
in financing to
3.5
million
startups and small businesses.
Statistic Source: U.S. Global Entrepreneurship Monitor

Nearly
75%
of small businesses use CPAs to manage their finances.
Statistic Source: Intuit Accountants Central



Jennifer Pellet is a freelance writer in New York City specializing in business and finance.