The scandals have not only left more stocks ignored by large companies-they've also eroded Americans' trust in large Wall Street firms' advice. In fact, polls now consistently show that average investors mistrust nearly all the larger firms' research. "We get many people walking in here for the first time specifically because they don't trust the bigger names," says Emily Sanders, 50, founder and president of Sanders International Inc., a small financial advisory and investment management firm in Norcross, Georgia. "They think it'll be easier to hold us accountable." Indeed, while Sanders once shied away from advertising that her firm was small for fear investors equated small with lack of expertise, now she openly advertises her company's size to lure customers.
Sanders, too, has found a niche, which is crucial to smaller investment houses. Sanders International focuses on affluent young women, whom she believes are still treated shabbily by larger, male-dominated Wall Street firms. "They talk down to [women investors] all the time. We never do," she says. Today, Sanders manages over $80 million in client assets, and 50 percent of her customers are women, a high figure in the industry.
Some small financial companies will benefit directly from the big firms' $1.4 billion settlement. As part of the fine, the 10 big investment houses will pay roughly $450 million for independent research not tainted by ties to brokers and investment bankers. As further punishment, the 10 big boys will be required to post the independents' research on the big firms' own websites, a kind of free advertising for entrepreneurial investment firms. Already, a group of five small investment research houses have banded together, forming a consortium called Best Independent Research, to provide research to the big firms' sites and toll-free investor hotlines. Meanwhile, the Bank of New York has signed agreements with more than 150 independent suppliers to distribute their research.
Though other small companies may not benefit directly, smart entrepreneurs have used the big firms' troubles to convince clients that small research is better. "We're so different from the Wall Street firms because they make money selling stocks, and we only make money doing research," says Chris Hackett, who started his own firm, Greenwich Investment Research Inc., in December 2001 out of his Greenwich, Connecticut, home. To show he stood behind his work, unlike the larger firms, Hackett took a bold risk. From the start, he invested his own money in the stock picks his firm touts. "I put my retirement funds, my investment for my kids, into every piece of research we do, and we stay in that position alongside our clients," Hackett says. "When you're betting your own money, you really don't want to make a mistake."
Hackett focuses on high-end professional investors, including some of the biggest mutual and pension funds, selling them his intensely detailed research reports-dense 20- to 30-page documents he compares to "a thick issue of The Economist"-for a fee of $20,000 annually. Hackett also does extra, tailored, follow-up research on any stock for a customer. "We wouldn't want to get too big-it's really important that we have a direct relationship with clients," Hackett says. Still, "Hackett's Special Situation Report" has proven profitable enough that the two-person firm recently added a marketing expert.
Hackett believes his research is simply better. "We look for anoma-lies in the market that bigger firms miss," he says. Hackett points to CenterPoint Energy, a Houston-based power corporation, as an example. "Everyone on Wall Street hated [CenterPoint] last year. It was at $5 a share because they'd done some stupid things on their balance sheet," he says. "But amidst the mess, they had strong earnings. We went against everyone from Wall Street-my dad's own stockbroker told him not to invest with me in it. But it was a no-brainer." Today, CenterPoint trades at nearly $11 per share, and clients of "Hackett's Special Situation Report" reaped huge profits.
For people without knowledge of investment advising, getting into the business seems like a snap. There are relatively low barriers to entry, since it doesn't take much capital to open an office, and getting certified as an advisor is not difficult in most states.
But building the kind of trust that attracts clients is much harder. Emily Sanders, founder and president of investment advisory firm Sanders International Inc. in Norcross, Georgia, believes finding a market niche is crucial. In her case, it's affluent women-an underserved client base. Similarly, Jennifer Black, a financial analyst who formed Jennifer Black & Associates from her home in Lake Oswego, Oregon, has focused on researching apparel and retail companies, becoming an expert in these areas.
Once they find that niche, savvy entrepreneurs use unconventional ways to reach these clients. Big financial firms tend to attract clients through traditional advertising and word-of-mouth, which can be expensive and time-consuming. But Sanders, for instance, has become a corporate contributor to the Atlanta Women's Foundation, a nonprofit organization, to help promote her services and net new clients.
Perhaps most important, given the current skepticism toward investment research, entrepreneurial advisors must promote their independence, the key advantage that sets them apart from the big boys. Small financial advisors simply have to use every opportunity to emphasize that because they don't have brokerage operations, their research can't be tainted.