Cures for the Stock Research Business

McKinsey has some ideas on how to fix the research division of investment banks (free registration required).

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.

I think these insights are accurate. The Web has decreased trading costs and made information easier to access for everyone, yet we still have high paid analysts cranking out research. I hope the industry implements these recommendations. But my guess is that years from now when the dot-com bubble is a distant memory, we will go through something similar once again.