Stock Research Gets More Reliable

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1 Page 1 of 5 Free Dow Jones Sites News Technology Markets Your Money Opinion At Leisure Home Page Take A Tour Subscribe In Today's Paper Portfolio Setup Center Discussions Site Map Help Contact Us MONEY June 7, 2005 Stock Research Gets More Reliable Third-Party Reviews Suggest Improvement In Performance of Buy-Sell Recommendations By JANE J. KIM Staff Reporter of THE WALL STREET JOURNAL Dow Jones WebReprint Serv Next month will mark one year since the nation's biggest brokerage firms agreed to provide individua investors with independent stock-research reports. The results so far: A variety of third-party assessments have found the quality of the new research rep be generally good. But for investors there is an important side benefit to the settlement: some evidenc past year that brokerage firms' own advice on when to buy and sell stocks is becoming more reliable. the new independent options, investors still rely far more on the stock research generated by the majo brokerage houses. HOW THEY STACK UP Investars.com has ranked research firms that cover more than 500 stocks by how much each firm's stock picks outperformed or underperformed the S&P 500 Index over the past year. RESEARCH TIPS How to use the independent research reports that 12 major brokerage firms are offering their clients: Independent ratings appear on brokerage statements and trade confirmations. To get access to full independent reports, visit your broker's Web site or call its special toll-free number. For free access to performance data on select independent firms, go to investars.com, starmine.com or if you're a customer fidelity.com. As part of the $1.4 billion "global settlement" with the Secur and Exchange Commission and a variety of state regulators, major brokerage firms ranging from UBS AG to Citigroup I Smith Barney unit began offering at least one independent re "buy," "sell" or "hold" rating alongside their own analysts' ra last July. (Two other firms later joined the settlement.) If a M Lynch & Co. analyst issues a buy recommendation on a part stock, for example, the firm also has to offer an independent evaluation of that stock. The settlement came in response to allegations that the firms research was biased because it promoted corporate clients' st win investment-banking business. Since independent analyst have business relationships with the firms they cover, they're generally considered to be more objecti Clients can request the research through their brokerage firm's Web site or toll-free number. If you ow stock that is covered by the firm's own analysts, in most cases the independent firm's ratings are also included on your trade confirmations and account statements. And if a broker calls you with a stock t she must tell you that independent research is available. So how is the independent research stacking up to brokerage offerings? Past analyses by academics a tracking services such as Investars.com showed that many of the independent firms did much better i

2 Page 2 of 5 stocks than analysts at investment banks, particularly when the market was performing poorly after th downturn. Their recent track records, however, are closer to Wall Street's. (See page D2 for a chart on research firms stack up and their current ratings on three widely held stocks.) Over the past year, some of the brokerage firms that were part of the settlement deal have climbed hig the rankings of the best-performing research shops. In the latest one-year period through May 1, for e Piper Jaffray Cos. climbed into the ranks of the 10 best-performing research firms that cover more th stocks, up from a ranking of 21 based on four years of data, according to Investars.com, which evalua performance by measuring how each firm's buy and sell picks perform against benchmarks like the S & Poor's 500-stock index. The research divisions of Merrill Lynch, J.P. Morgan Chase & Co., Deutsche Bank AG and Credit Su Group also improved in the latest one-year rankings. Just a few years ago, the bulk of Investar's top s were filled by independents. One reason behind the brokerages' better performance: More are now ty analysts' compensation to the performance of their recommendations. StarMine, another firm that measures research performance, says that brokerage analysts improved in and 2004, outperforming industry benchmarks by about 2.2% and 1.3%, respectively. In 2002, by con investors who had followed Wall Street's buy and sell recommendations would have underperformed benchmarks, according to the firm. In addition, a study released last fall and updated to include more data last month by Washington University's Olin School of Business and the University of Pennsylvania's Wharton School found tha the global-settlement deal was put in place, analysts have been significantly less likely to weight thei in favor of companies that do business with their firms. Still, many of the top-rated stock analysts in last month's Wall Street Journal Best on the Street surve which ranked 213 analysts at 73 firms based solely on their stock-picking ability came from indepe firms such as Standard & Poor's, a unit of McGraw-Hill Cos. and Sanford C. Bernstein & Co. Not all these independents are offering research through the settlement; the biggest that do include Standard Poor's, Morningstar Inc. and Argus Research Co. Many experts say it's difficult to gauge the overall performance of independent firms. Many firms do make their ratings public or provide their research to some of the third parties that track performance are also numerous ways to measure performance, so one firm's track record might look stellar under o performance system, but fall to the bottom of a list according to another system. Just how many independent research reports investors can obtain depends on their brokerage firm. In that's because certain firms are required to spend more than others, based largely on the size of the fir the number of customers it has, according to an SEC spokeswoman. Lehman Brothers Holdings Inc., is required to spend $25 million over five years, will provide investors with just one outside report pe while investors at firms such as Morgan Stanley, which must spend $75 million, also over five years, receive at least three independent research reports on most companies. A number of the brokerage fir using some of the same sources for their independent research. So far, individual investors don't appear to be using the independent research in significant numbers, some of the independent firms are complaining that the brokerage firms aren't doing enough to promo research. Partly because regulators haven't asked the settlement firms to track usage, there is little information available on how many people actually request it. A study released last month by Standa

3 Page 3 of 5 Poor's found that about 40% of investors aren't aware of the global settlement and that there is only a level of awareness of the availability of independent stock research. Some firms, though, are reporting increased investor interest. "Usage has picked up constantly every month," says Bridget Macaskill, the independent consultant for Merrill Lynch, which offers research Morningstar Inc. and BNY Jaywalk, a unit of Bank of New York Co. that aggregates and distributes from more than 150 independent firms. At Bear Stearns Cos., investors are viewing the independent research reports online at about 25% of t at which they are looking at the company's own research. The firm has launched an Internet tool that, other things, notifies clients and its sales force anytime there is a ratings change and enables investors compare the independent firms' ratings against the ratings of other independent firms as well as the fi own ratings. The research settlement doesn't appear to have resulted in a financial windfall for independent firms, are typically paid a flat rate based on how many stocks they cover, not on how many of their reports a requested by investors. Still, the size of the industry has grown. Today, there are about 350 to 400 independent equity-research firms in North America, generating about $1.4 billion in annual sales, up fewer than 50 firms five years ago, says Michael Mayhew, chief executive of consulting firm Integrit Research Associates LLC. Some discount brokerage firms not involved in the settlement are using their independent research of as a selling point to attract customers. In February, Fidelity Investments revamped its offerings by ad two more independent research firms and performance data from Investars.com and StarMine showin each firm's recommendations compare to others'. Fidelity customers now have access to free research from 12 independent research firms and one investment bank. (To get the reports, customers can sear under "Research" at In some cases, investors may be able to buy reports through other third parties, such as Investars.com charges investors $20 a month for access to its site where they can buy research, and Reuters.com, w also sells independent and brokerage research for $10 to $2,000 per report. A few independent resear firms, such as ValuEngine Inc., also sell their research reports directly to the public.

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