The Beginning of Reconstruction

A little more than a year after the historic $1.4 billion settlement, the securities industry has quietly begun the process of winning back what it gave away in those scandals.

A little more than a year after the historic $1.4 billion settlement, the securities industry has quietly begun the process of winning back what it gave away in those scandals.

The starting gun for this trust-reclamation effort sounded July 28, the date the SEC set for compliance with the provisions of the settlement. One of the most conspicuous of the requirements is that advisors at the firms involved in the settlement give clients access to research from three different independent providers.

Many in the industry acknowledge that this may give advisors a starting point for rebuilding the trust the industry squandered in its research conflict-of-interest scandals. But few believe the revamped research requirements will have any tangible effect on investors.

“It isn’t going to change a thing,” says Louis Harvey, president of Boston research firm, Dalbar, adding that he believes the settlement amounts to letting the industry off the hook.

Noting that the average investor lost $20,000 between 2000 and 2002, Harvey maintains that improving the way research is handled is not going to have the impact Eliot Spitzer envisioned when he stated at the 2003 settlement announcement that he aimed to “empower investors to use securities research in a practical and meaningful way.”

He’s not alone in his skepticism.

Matt Bienfang, senior analyst at the Needham, Mass.-based research firm TowerGroup, said investors are unlikely to make use of the extra research. They typically look to advisors for guidance on such matters, and most investors will continue to do so even now.

“We all have jobs, other things we have to do, so there’s going to be a reliance on the advisor to provide a recommendation of which research is the best,” says Bienfang.

That’s the good news for advisors: Investors are still looking to them for guidance.

This guidance could prove all the more important because, he notes, the research recommendations from different firms often are at odds with one another—something that could confuse, rather than help, investors.

Harvey says this is precisely what takes the teeth out of the independent research provision. He says that without completely disassociating retail and underwriting from research, the danger of conflicting interests will remain. For instance, an advisor who is presenting research from his own firm along with others will almost necessarily feel compelled to support his own firm’s research findings, and this undermines the very purpose of offering alternatives.

“It should be very clear—if a firm does one, it must not do the other, period,” he says.

Still, the additional research accessibility “jibes well with the trend in the industry towards reps as trusted advisors and planners, instead of product pushers,” says Alvi Abuaf, head of financial services, North America, at Capgemini.

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