Word on the Street

Scandal-ridden investment houses are leaving gaps in the financial market, and savvy entrepreneurs are jumping at the chance to fill them. How will this trend shape the new face of Wall Street?

Waheed Hassan hardly reminds anyone of Gordon Gekko. A 31-year-old stock analyst with a high, boyish voice, Hassan founded his Potomac Falls, Virginia-based independent stock research firm in May 2003, with two other partners. Hassan's firm, Investology, remains tiny, with only one full-time employee. Unlike analysts at big investment banking firms, Hassan doesn't appear on CNBC in sharp suits, give frequent quotes to The Wall Street Journal or expense fancy lunches. No, Investology toils in relative obscurity, focusing on stocks of companies most Americans have never heard of. "We do research on small capitalization stocks," says Hassan. "Merrill Lynch, Morgan Stanley-they don't cover small caps [today], so it's an opportunity for us."

These days, there are more and more Waheed Hassans, and fewer and fewer Gordon Gekkos. Over the past three years, as IT has made it easier for entrepreneurs to sell stock research, and as scandals involving Wall Street brokerages have sullied the image of the largest firms, the market for independent stock research and analysis has opened up. And savvy entrepreneurs like Hassan are stepping into the breach, taking business from the financial giants. Indeed, despite its hand-to-mouth existence, Investology's independent research has already won the company a relationship with one of the bigger U.S. pension funds.

The Scandal Effect

For decades, most stock research was handled by large firms that employed reams of analysts to cover a wide range of stocks. But they didn't just analyze stocks: The big boys also made money with financial advisors, brokers and investment bankers.

Since 2000, however, investigations by financial watchdogs have revealed that some of the larger firms' stock research was not truly independent. Corporate chiefs at the bigger investment houses were pressuring analysts to rate certain stocks highly so their brokers and investment bankers could sell more of the stock, and the investment houses could then benefit from public offerings of stocks they had touted.

Many individual investors-especially those who jumped into the market in the go-go '90s-believed the analysts were independent and lost billions betting on their recommendations. In the wake of a multiyear investigation into the big firms' research, 10 large Wall Street firms admitted their wrongdoing and, in April 2003, paid a $1.4 billion fine.

These scandals have given entrepreneurs two historic opportunities. First, as larger Wall Street investment houses faced huge fines for their actions, they had to cut costs. Big Wall Street houses laid off hundreds of stock analysts who had the expertise needed to offer high-quality research, with several firms cutting as much as 40 percent of their staff. Consequently, the big firms simply stopped monitoring whole groups of stocks, like the small caps that Investology focuses on.

David Riedel was one of those experts. In 2002, Riedel was laid off as an analyst at Salomon Smith Barney. "I realized there were huge opportunities [due to] the breakdown in certain types of research by bigger firms," he says. With a strong background in Asia-Riedel got a graduate degree in business from a Thai university, speaks Thai and Chinese, and had analyzed Asian stocks in the mid-'90s for Salomon Brothers-he decided that Asia would be his niche. As the larger firms downsized, they cut most of their independent research on the ground in Asian markets outside China and Japan, Riedel says. Yet, in the past three years, he says, these Asian markets have posted some of the strongest growth in the world. Seeing that hole, in May 2003 Riedel started his own company, Riedel Research Group Inc., out of his New York City loft.

Riedel, 37, hired seven local analysts in three Southeast Asian countries, and hit the ground fast, focusing on Indonesia, Malaysia and Thailand. The internet made it even easier for him to get started. After hiring Thai analysts through local word-of-mouth, he turned to an Asian online job board to find his other analysts and has been thrilled with the quality of their research.

With a niche in place, he started drawing on old connections, emphasizing that he was offering services others didn't. "I pitched my research to [mutual and pension] fund managers who have holdings in Asia [and] are being poorly served by big investment firms [that] don't have analysts on the ground," Riedel says.

Six clients quickly signed up with Riedel, and he plans to have 30 by year's end. Riedel believes his on-the-ground information, tailored to his customers, has paid off. He advised clients not to pull out of holdings in Indonesia, despite the country's recent political instability due to terrorist attacks. This year, Indonesia quieted down, held a peaceful presidential election, and watched its stocks soar.

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This article was originally published in the January 2005 print edition of Entrepreneur with the headline: Word on the Street.

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