But even as the financial industry changes, it's hardly easy going for entrepreneurs. Selling research on larger capitalization stocks-the big, well-known companies that are interesting to a wider range of investors-remains tough sledding for small firms. "I can't compete with [bigger firms] writing a report on IBM," says Hassan. "They have too many analysts on it." Indeed, even midsize research companies like Chicago-based Morningstar, which has made itself a brand name in the industry, often shy away from doing detailed research on the biggest caps.
Still, independent research firms can be proud of the strides they've made. A new study by three eminent finance professors-Brett Trueman of University of California, Los Angeles; Brad Barber of University of California, Davis; and Reuven Lehavy of University of Michigan, Ann Arbor-found that independent stock firms made more accurate stock picks between 1996 and 2003 than the larger Wall Street companies. In the weaker, post-2000 stock market, the independents outperformed the larger investment firms by an even wider margin, perhaps because the independents were not worried that downgrading companies would hurt their brokers' abilities to sell stocks. If they keep it up, maybe one day entrepreneurs like Waheed Hassan will rule Wall Street.
One reason the smaller companies have a chance in the investment business today is that many Americans no longer trust the big boys. Over the past four years, a series of scandals have suggested that some of the analysis of larger investment firms is Biased. Here are just a few of the highlights-or lowlights.
After an investigation by regulators into conflicts of interest in its research and analysis department, Merrill Lynch pays a $100 million fine. In the investigation, e-mail messages by leading Merrill Lynch analyst Henry Blodget leak to the press. The e-mails suggest that several of the analysts, including Blodget, publicly talked up stocks that in private they disdained-stocks whose investment banking business Merrill wanted to win. Later, similar e-mails come out at other top firms.
New York Attorney General Eliot Spitzer files suit against top officials from five telecommunications companies, arguing that they gave investment banking business to Citigroup in a deal to have Citigroup analysts boost the ratings of their stocks.
In an ongoing investigation by regulators into conflicts of interest at several other top Wall Street houses, including Goldman Sachs, Morgan Stanley and Citigroup Global Markets (formerly Salomon Smith Barney), the big firms agree to pay a whopping $1.4 billion fine.
Spitzer and the SEC announce that they've launched another investigation-this one into conflicts of interest among several of the largest mutual fund firms.
Citigroup Global Markets fires four of its brokers after further investigation into their trading practices.
The SEC announces a new set of ethics codes for mutual funds, requiring them to provide more disclosure of some of their trading practices.
Janus Capital Group, one of the larger American mutual fund groups, agrees to pay a fine of $226.2 million after an investigation by regulators into improper trading.
Joshua Kurlantzick is a writer in Washington, DC.