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Research cost riddle proves hard to crack

How to pay for research is one of the toughest riddles on Wall Street. The challenge, says Smith Barney's director of global research, Bill Kennedy "on a global scale as well as in the US, is to take the talent we have and find a way to package it that is both investor-friendly and commercial".

The 2001 report by Paul Myners commissioned by the UK Treasury to look into institutional investment decision-making has played a big role in focusing attention on the issue, as it is forcing firms to unbundle research costs from trading costs. "That's made all of us, on both the buy and sell sides, assess just how much we pay for research and what we get for it," says Kennedy.

The investigations into sell-side research by New York attorney general Eliot Spitzer brought that assessment into sharper focus, as it had an immediate impact on research budgets. Brad Hintz, brokerage analyst at Sanford Bernstein, estimated in October last year that Spitzer's plans to bar underwriting and advisory revenues from subsidizing research, which came into effect this year, would knock 23% off US direct research budgets.

Banks have drastically cut back on the number of analysts and the number of stocks covered as a result of that and the general downturn, and there could be more cutting to come, according to some bankers.

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