Both organizations and individuals need effective financial tools that will help when making critical investment decisions. In order to be “effective,” investment research should help investors to achieve their expected results. But what about “cost?” The current emphasis on reducing expenses and controlling costs means that investment research expenditures should be monitored while also paying close attention to the quality of investments selected with the help of research tools.
Is Cost Effective Better Than Free?
Some investors might boast that they don’t pay anything for investment research. When something is “free,” expectations are often reduced. While “free research” might have some initial appeal to a few, long-term investment results are usually more important to prudent and demanding investors.
Investors should not settle for anything less than high expectations with a new or potential investment. If free research lowers investment expectations, long-term investment results might suffer as well. By paying for cost-effective investment research, investors will achieve more accountability and obtain exactly what they need.
Investment banks and other financial firms traditionally offer “free research” to their clients. Unfortunately for investors, the focus of such biased research is usually to sell something rather than to help a business or individual choose the best investment. An investment banking firm frequently has an undisclosed conflict of interest when they are attempting to sell securities on behalf of one client to unsuspecting buyers and clients who are simply looking for a good long-term investment.
Bank deregulation has impacted the quality and purposes of investment research offered by many financial firms. For example, the elimination of the Glass-Steagall Act in the United States has resulted in increasing conflicts of interest that are now permitted by law. To avoid such built-in ethical conflicts, one practical solution is for investors to obtain their investment research from an independent and unbiased source. Here are several suggested attributes for effective investment research firms:
- Independent (no affiliations with securities firms and investment banks).
- Unbiased (not trying to promote a specific security on behalf of another client).
- Customized for the client (investors should receive exactly what they are looking for).
- Accountability (research firm paid for services and required to deliver based on contractual terms).
- Cost-effective (a fair price but not free).
Due Diligence and Investment Research
A systematic due diligence process is used by most successful long-term investors. Cost-effective investment research should be designed to eliminate inappropriate investments before they are purchased while simultaneously controlling risks for investors. Evaluating hundreds or even thousands of potential investment candidates is often required in the search for the best long-term financial choices.
A due diligence mentality can help investors from the earliest stages of investment research to long after a purchase is finalized. A long-term holding period places a premium on monitoring current investments so that appropriate changes can be made. While cost-effective research can help investors to make initial investment decisions, the practical need for independent and unbiased research lasts as long as the investments are owned.
– Research Optimus