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.
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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.
Finding Your Niche
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.
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