FREEMAN : Only he who pays the research piper can call his advisory tune

WHAT separates professional investors from amateurs is a disciplined approach, based on hard facts. They're sceptical of tips without thorough back-up. Most players talk their book. Wall Street revelations show how divergent public declarations can be from private views. Yet investors, whether fund managers or private punters, are loath to pay for stock market research. Why would we expect to get something for nothing? If someone knew how to get rich quick they'd do it themselves and not tell you. Broker research is declining in quality and volume because it is increasingly unpaid. Sadly, financial service providers are not philanthropic organisations. Few work for nothing. Analysts focus on the biggest, most saleable and least risky - at least, for the analyst - shares. Smaller stocks were always neglected, both in volume, depth and quality. Now independent research generally is declining. Recent - albeit self-interested - research by John Borgars of Equity Development illustrates the point: stocks neglected by analysts underperform by a third in terms of stock market ratings. Also the 'bid-offer spread', or difference between what you buy and what price you sell at, is 50pc higher. Adding just one analyst cuts this spread disadvantage to 25pc. There is a self-reinforcing relationship between valuation and liquidity: the harder it was to sell your shares, the bigger the difference between bid and offer price. The bigger the difference, the harder it is to interest investors and the greater the discount you are forced to offer off fair market value. When the stock market was regulated, cross-subsidisation of typically modest research was assumed - in the same way as Irish clearing banks used captive savings to subsidise transactions. Following London's 'big bang', the market developed rapidly: research became a selling tool, particularly when seeking to cut a slice of lucrative foreign institutional business. During the hungry 1980s, Goodbody's then economist Peter Bacon helped convince German fund managers that the Irish pound was really a green deutschmark, and that they should buy higher-yielding Irish gilts. Davy and other brokers marketed Irish blue chip stocks like the banks at the very time that Irish fund managers were diversifying into the eurozone. All of which switched attention away from smaller stocks - which fund managers had been forced to consider because of traditional currency controls and desire to match currency assets with liabilities. The development of 'market-making' has morphed into proprietary trading. Market makers make a market but on terms that limit their exposure. Since they're there to be shot at, they determined to shoot at hapless punters first. Meanwhile, an unforeseen consequence of industry consolidation was the rise of corporate finance from modest origins in equity issues to encompass most aspects of merchant banking. Deregulation democratised equity markets, launching them on an 18-year boom in 1982. More players became interested in shares. The system became meritocratic, requiring reliable accounts and objective assessment. Sadly, auditors and researchers betrayed their trust as soon as their role became valued. Faced with the conflicting appeals of money and duty, they chose the former. The investment research industry still reels from scandals of the boom. Wall Street's excesses have been highlighted: internal e-mails frequently differed from advice given to clients. US excesses have been high-lighted, but their Dublin equivalents continue as if untouched by such scandals. Elsewhere, the witch-hunt may have gone too far. Ireland's establishment reacts hysterically to even mild press reproach. We have American-style excess without the balance of assertive clients and questioning business press. Analyst research is compromised. No matter how diligent and honourable, analysts and, indeed, journalists can be influenced. The good ones signal this in code. But if you don't understand their language, you're disadvantaged. Some reforms seem unequivocally good: there is less hype. Brokers often avoid any explicit advice on whether to buy or sell. The problem was that conflicts of interest abound: research was funded by corporate finance fees of even proprietary trading profits. The best way to achieve objectivity is to pay for your research. Yet few do. The private investors most vulnerable to being misled are exactly those with insufficient time and training to interpret for themselves. Those who are often prepared to pay for research are the companies being researched: there is an emerging industry that charges explicitly. They are really prostitutes masquerading behind casuistry and often linking research with share promotion services. The more they are paid, the better and more thorough their preparation. But it may simply be beads more cleverly packaged as jewellery. We are all ambivalent about promotion: we want a share to be undervalued and unloved when we buy, but then overvalued so we can sell. Even hyped stories may be worthwhile. There's no point paying someone to promote your story if you've no story to promote. Paid research can be useful but needs to be part of a balanced diet. What facts have been left out? What assumptions are reasonable? Is the analyst simply wrong? Typically, you get out of research what you put into it: it's easier and quicker to rely on the judgement of someone you understand. Reform so far typically deals with the problem by stopping cross-subsidisation. In effect, this means stripping analysts of funds: instead of imperfect research you get fewer companies covered or less detail. Much research is done by juniors without real understanding or much experience. The analyst's role is being reassessed. The more independent, the more likely to be objective and therefore useful. Maturing investment communities both allow us and force us to become more professional. Yet for analysts to treat punters, rather than their dealers or companies as clients, involves punters taking responsibility by coughing up part of our winnings.