The Little Guys Get Some Respect

Smaller research firms are enhancing their cachet as the giants slash their payrolls

When Henry Blodget, the controversial Internet analyst, resigned from Merrill Lynch on Nov. 15, he made the headlines. But he was just one of the latest and more high-profile victims of Wall Street's latest round of bloodletting. As big brokerage houses and investment banks rush to prune costs, they are finding analysts, and the research they produce, prime candidates for cutting.

Hundreds of analysts and support staff are among the 18,500 who lost their jobs at securities companies in the seven months preceding September 11. And there has been no letup since. In mid-November, Goldman, Sachs & Co. (GS ) dropped 50 people from its research shop. Citigroup's investment banking subsidiary, Salomon Smith Barney (C ), let 300 people go on Nov. 8, including a dozen from its equity staff. Morgan Stanley Dean Witter & Co. (MWD ) dropped four analysts at about the same time. This on top of a wave of consolidation among investment banks that has left whole research teams jobless. "We've seen a significant culling of research capacity" on Wall Street, says Sean Ryan, head of equity research at small broker Fulcrum Global Partners.

DECIMATION. The decimation in the big houses is playing into the hands of smaller shops such as Fulcrum, which has doubled the number of analysts it employs to 14 since May. Independent research firms--which sell reports or earn commissions from clients' trades--are attracting new clients among big institutions such as pension funds. One appeal: Most of the small fry don't do investment banking business with companies, so they have less reason to placate company management with positive recommendations. Off Wall Street, a decade-old Massachusetts boutique that only issues sell recommendations--a traditional no-no among most big banks--has added two analysts this year, bringing the number to eight, as demand for its research increases. There's some evidence that small er shops are better stock pickers. "They consistently rank in the top 5 or 6" by performance, says Kei Kianpoor, CEO of, a Web site that ranks analyst picks. "They're a lot better than a many of the investment banks."

Certainly there's little denying that Wall Street's research effort, which has faced widespread criticism for its large component of hype, is getting skimpier by the day. The big houses are suddenly dropping coverage of whole sectors. For instance, many no longer cover most CLECs, or competitive local telephone exchanges, that were highfliers until last year. Morgan Stanley recently reduced coverage of the machinery and Canadian telecom industries. Goldman Sachs stopped following five real estate companies in June, because it has fewer analysts on the sector.

Meanwhile, spending by big banks on support staff and travel to visit companies is going out the window. Indeed, budgets at one top-tier firm have gotten so tight that a senior analyst there pays the monthly bills for his staff's BlackBerrys--a portable e-mail device--out of his own pocket. "I just said fine, send me the invoice, I'll pay for it," he says. "I need my staff 7 by 24."

Outside forces are at work, too. Big banks' research shops have lost much of their cachet because of Regulation Fair Disclosure. This Securities & Exchange Commission rule, put in place last year, requires public companies to share any price-sensitive information they want to divulge simultaneously with private investors, boutique shops, and investment banks alike. Previously, earnings calls could be limited to a handful of firms, and company executives would routinely give information first to the analysts they liked the best. Inevitably analysts at big banks won out. "Now I listen to a decent amount of conference calls myself," says Andy Rich, portfolio manager at Treehouse Capital. For investment ideas, Rich relies increasingly on small boutiques. "They are just a better source of ideas," he says.

CURBING PAYCHECKS. Cost-cutting on the Street is helping the 70 to 100 small shops to attract talent they couldn't have hoped for two years ago. That's because paychecks for analysts employed by the big investment banks have been cut way back this year.

Analysts make from $100,000 to $300,000 in base salary--but another 50% to 1,000% in bonuses related to the investment banking business they help bring in. Now that deals have dried up, bonuses have too, and there's little difference in compensation between big and small firms.

Still, longtime industry watchers have seen it all before. "There has been a cyclical pattern to this," says Chuck Hill, director of research at Thomson Financial/First Call. "Brokers cut back and boutiques hire some of them." Then, when times are good on Wall Street, analysts return to the big companies.

But, with access to financial information and analysis easier than ever, thanks to the Internet and Reg FD, that pattern may change. If the independents really are better stockpickers than the giants, they could have a bright future.

By Heather Timmons in New York

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