Are Research House Ratings Helpful in Investment Decisions?

Submitted by Marco Palmero on 17 July, 2011 - 17:23

Are Research House Ratings Helpful in Investment Decisions?

In this article we will delve into the question whether research house ratings are helpful in investment decisions.

What Are Research Houses?

In the context to the financial industry, research houses are companies focused on collecting data on investment opportunities and interpreting that information to give a particular rating which can range from a positive buy to hold and negative ratings. The rating gives an indication to investors whether the investment has future growth return possibilities.

Research houses have been taking a bit of flak lately due to the failure of a number of investments which they have given positive investment ratings.

Research houses fulfil the need to cover the vast numbers of investment products in Australia. In 2008 in Australia alone, there were over 3000 investment trusts for general savings and investment, about 300 allocated pension for income during retirement and more than 4000 superannuation funds for retirement savings. Compare the number with the 25,000 funds from the USA which has almost 15 times Australia’s population. The figures above don't even consider the alternative investment products on offer such as reverse mortgages, lending products, risk insurance products and agribusiness investments.

Research houses are used by financial planners and especially boutique financial planning firms and other dealers to outsource the research function of their work - helping them save time in assessing and selecting investments for their clients. Research reports provided by these firms are used by financial planners as a form of insurance so if the investment goes sour they can point to blame to the researcher.

Research House Business Model

Financial research houses are usually set up and reimbursed for their services in two ways. One method of payment is subscription based and the other business model is a pay for ratings type model.

Research House Controversy

The financial research industry is under scrutiny by ASIC (Australian Securities and Investments Commission) when a number of investments which were given a positive rating failed. Certain companies gave positive ratings to agribusiness schemes (Timbercorp and Great Southern), hedge and mortgage funds (Westpoint and Basis Capital) which had failed in recent years.

Because of how the industry currently operates, fund managers may shop around for a researcher who is likely to give a great rating which they can in turn use in their marketing and advertising to promote their funds to investors and financial planners. At the present moment there is no requirement to disclose how the researchers are compensated for their work or any conflicts of interest.

Investment Trends

Research houses have been taking a bit of flak lately due to the failure of a number of investments which they have given positive investment ratings.

Retail investors, the public, are turning more to direct investing and perhaps even active share trading activities due to the loss in confidence. Demand for other direct investment products such as ETFs (Exchange Traded Funds) are booming.

Are Ratings Helpful in Investment Decisions?

Ratings can be helpful in investment decisions, but use it at your own risk. The research houses specialise in finding out and interpreting the information to see if investments are worthwhile investing hard worked money. As we have shown, there are issues within the industry which may work against their best intentions, such as the enormous number of funds to analyse and possible conflict of interest as well as the methods of compensation for their services.