By Jeffrey Kraws
In a highly competitive environment where companies compete to have investors aware of what their company offers, being heard correctly and in an unbiased factually accurate manner is of critical importance. It is not enough to just have investors hear a message, rather the information right down to the source needs to be factually accurate and credible so that investors can build their knowledge base with confidence, making decisions to take further steps with a company wherever that may lead them.
Every investor knows that the market involves risk. Nobody expects a guaranteed profit. But what every investor expects and deserves is honest investment analysis that is untainted by conflicts of interest.
"The old model of stockmarket research is changing"
"Independent research outfits offer an alternative. Though small, their share of the 'research vote', an estimate of market share produced by Greenwich Associates, has grown since 2011. They are untainted by the conflicts of interest that bedevil banks offering research on clients, and that led to a 2003 settlement enforcing stricter separation of investment banking and research in America."
- the Economist, Sep 21, 2013
Conflicts of interest pose significant dilemmas for research coverage, beginning with research analysts themselves. As analysts write research reports and make buy/sell/hold recommendations, their analysis may be influenced by financial (and career-related) incentives to directly or indirectly support investment banking business initiatives on behalf of their employers.
While some major financial institutions endeavored to challenge these accusations by separating their investment banking and research units, an even more radical proposal has taken root: a separate research entity, funded by the settlement payment from several firms under investigation. This entity acts as a liaison between investors and the firms in which they hold interests. By eliminating the financial obligation, the industry hoped to eliminate the potential for biased analysis and coverage.
This goal was laudable and honorable, but the reality is that many worthy and important companies are being overlooked in the keen competition for analyst attention. In some cases the only viable option for companies will be to pay a third party to provide the needed coverage and exposure. Paid-for analysis thus represents a clear example of highly subjective recommendations based upon direct financial incentives. To this end, time and again, great stories have gone unrecognized because subjective and inherently biased ratings/target prices leave the financial community questioning the objectivity, validity, and integrity of the analysis. As a result, many of these paid-for stock reports are discarded by investors and even banned from many reputable PR and financial distributors for being promotional rather than credible.
From this example, it may appear that there is no feasible way to avoid the numerous pitfalls of tainted research. We believe the answer, therefore, is not in the affiliation, but in the content of the reports.
Independent research attracts and entices the investment community by providing them with the necessary tools and information with which to make sound investment decisions. We believe the best reports distill and present only the essential facts of the covered company: no projections, no buy/sell ratings, no overwhelming financial jargon or highly technical information, and no siren call of stock price prognosticators. This type of research allows investment professionals to make fully informed and educated investment decisions based on the most important recommendation: their own.
The National Investor Relations Institute (NIRI)
The National Investor Relations Institute (NIRI) concurs with this model of independent research.
"...Such reports should contain factual research conducted by a qualified analyst and should avoid the expression of opinions about the company's prospects and must not contain a recommendation that one should acquire the stock."
Those on the buy-side are already working to accommodate the need for this type of independent coverage. Several investor-sponsored entities have been established to report analyst-free coverage aimed at providing investors with unbiased research. While still performing on a relatively small scale, the demand for this type of research is growing.
Small-cap companies must seek out independent research firms that can undertake the same type of fact-based analysis or face the consequences in the intense competition for outside investor funding.
By implementing a new and innovative style of independent research, it will be possible to put these conflicts of interest in the background and bring about reform in a way never thought possible. The unyielding call of investors for truly independent research in its purest, most untainted form would then be answered. Crystal Research offers paid for research, but is paid for its time to insure what the reader reads is factually accurate. This approach of utilizing only facts and solid due diligence, plays a meaningful role in helping companies legitimize their offerings and in educating the world about what it is that they do.
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