The clamor is growing louder for investment banks to be more transparent when it comes to their “cheerleading” research analysts’ reports and the trades they are executing on their own behalf. One critic, Richard Kramer, who walked away from a lucrative career as a top-rated analyst at Goldman Sachs to form his own independent research firm, Arete Research, questions, “Why do investors pay the likes of Goldman and Morgan Stanley execution fees when their proprietary desks are trading against them?”
Others counter that the large, integrated investment bank model is the only way to subsidize serious market analysis and long-term research, according to an article in the Financial Times online. Still, the battle lines are forming between the giant one-stop investment banking firms and smaller, independent, “unbundled” boutique research shops.
The recent market meltdown has added to the argument that research should be unbundled from trades, as some investment banks were caught recommending investments in dying firms while others in their firm knew better. It has also spurred the growth of independent research providers, and the use of commission-sharing agreements (CSAs), a method of payment that opens the door for independent research providers. It may take a few years, but independent research houses may become the employer of choice for ambitious research analysts in the future.