Published April 13, 2009

Pay for research, please

By LYNETTE KHOO

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POOR market sentiment and trading volumes have taken a toll on broking fees and commissions. This has raised concerns over whether the challenging conditions may direct brokerage-backed research towards stocks that can better attract the volumes and revenues for the broking houses.

But brokerages are stuck between a rock and a hard place. While research costs and expectations of research quality have gone up, there is a general lack of interest among investors to pay for research.

Now, even in bad times, analysts are expected to still do some 'national service' and profile the neglected stocks. In a bid to defray costs and fund the research of less commercially attractive stocks, there may be a movement towards paid-research schemes.

The latest to join the fray is CIMB-GK, which rolled out the scheme this year. A company can receive coverage by paying an annual fee of $10,000 for at least three reports a year plus initiation coverage.

Not a bad idea for companies that want to have more options among the paid-research schemes available here.

But for the smaller companies, their greater priority now is to conserve cash, rather than to spend it on such 'publicity'. Thus, while paid-research schemes arguably opens a window for the smaller caps to become more visible to investors, the cost burden may still leave many out in the cold.

Some have also pointed out that the paid-research scheme model is not ideal, with research seen as 'marketing material' when paid by companies because of a perceived conflict of interest. There is also greater scepticism after paid-research by agencies and brokers are discredited in the current financial crisis for being overly optimistic or failing to identify the risks earlier.

There is a need for independent research. But who is going to pay for it? Some say that perhaps, the Singapore Exchange could commission and fund those research.

It remains to be seen if footing that extra bill would interest SGX. What it has already done is to give companies the option to join the Research Incentive Scheme (RIS) where each company pays an annual fee of $13,000 while SGX subsidises $2,000. So, brokerages do not directly receive payment from companies but from SGX.

This may help a little in alleviating concerns over any conflict of interest tainting research reports. But because of the cost burden on small companies, the SGX-RIS is not without its detractors.

Certainly, some fine-tuning of the SGX-RIS would be welcome. But a more sustainable research model is still one where investors pay for quality research.

For so long, investors are used to getting research for free. Perhaps, this is why truly independent research has not fully taken off here. Subscription fees are still not able to defray the total costs of research at SIAS Research and NetResearch, which have to be partially funded by the companies that they profile. Obviously, there needs to be a mindset change among investors. If they want unbiased, objective and transparent research, they have to pay for it. The independent research model has worked in Australia. Aegis, an independent research firm that covers some 240 stocks, mostly in Australia, is fully funded by subscriptions. The fees depend on the depth of research under a tiered system. Its coverage is based on a two to three-year horizon and contracts with clients, mostly financial advisors in Australia and New Zealand, are on a two to three-year basis.

'Clients are the ones that create the demand for independent research,' Aegis CEO Peter Leodaritsis told BT. 'When a brokerage house is remunerated by corporates, there may be a tendency from time to time to say 'Look, I'll back management on this issue'.'

Until such time when investors see independent research as something worth paying for, the breadth of equity coverage will shrink in bad times. And it will be companies - those that can still afford it - that pay for that research material.