Many in the investment-banking industry believe that the recent Wall Street settlement1 brings to an end the most difficult part of the overhaul of equities research. This could not be further from the truth. For reasons that go well beyond the legal and reputation issues, the research business is fundamentally sick.
Simply put, the research arms of the big investment banks are far too expensive given the structural decline in margins in the equities business. They urgently need to deliver more relevant, more original, and better-targeted research. While some analysts have provided company analysis that is useful enough to justify the cost, these individuals remain the exception.
Quite rightly, most attention will be paid in the short term to complying with the new settlement regulations and ensuring that the necessary firewalls are in place. But in the long term, if reputations are to be restored, investment banks have to provide a better product at a lower cost. They can do so by making the following changes.