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.
Scandalous!
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.
May 2002:
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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.
October 2002:
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.
December 2002:
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.
September 2003:
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.
October 2003:
Citigroup Global Markets fires four of its brokers after further
investigation into their trading practices.
May 2004:
The SEC announces a new set of ethics codes for mutual funds,
requiring them to provide more disclosure of some of their trading
practices.
August 2004:
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.
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