Hodson’s plan: Expose industry conflict

There are some who argue that regulation is ineffective, and that market forces can cure all ills. When it comes to compensation disclosure, the market may be about to get out in front.

Peter Hodson, who parted ways with Sprott Asset Management on Friday, plans to launch an investment research firm geared at providing “conflict-free” analysis for investors who worry they might be getting the short end of the stick in the markets.

“It’s really targeted at individual investors. The ideal client for me would be a person who has a broker, yet is highly skeptical about what’s going on in the investment community.”

He adds many investors have grown wary of calls from their brokers, recommending new initial public offerings and structured products. If the broker works for the underwriter of an IPO, for example, there’s probably a built in incentive to sell the client on that specific investment.

“On most new structured products and new IPOs, there’s no research. The only thing that investor has going for them is their relationship with their advisor,” says Hodson. “If you trust your broker, you’ll buy it; if you don’t trust your broker, you won’t. Quite honestly, if you don’t trust your broker, you shouldn’t talk to him.”

He hopes to go live with 5i Research before the end of the year. The service will allow members to get a second opinion of some of the offerings recommended by their advisors. The key to his offering, he says, is that it will be free of conflicts of interest.

“You may not like the opinion, but the only thing you’ll know for sure is that we are not getting paid by anybody other than you,” he says. “We don’t have an affiliation with a broker; we aren’t involved in the deal; we’re not investment bankers.”

Hodson will use multiple brokerage accounts to gain access to research, and then apply his industry experience to form an opinion on the offering. His goal is to produce “very readable” and concise reports, rather than a massive tome designed to impress the company.

“Its not going to be a glossy 45 page report—it might be three-quarters of a page, telling you who’s getting paid, what’s in it for you, and whether you need to buy it.”

Initially, 5i Research will provide coverage of the IPO market, along with structured products, which he says will be the firm’s claim to fame.

“The IPO that the average investor gets called on is typically the one they don’t want,” he says. “I won’t have insight into the Canadian version of the next Facebook, but you aren’t going to be getting a call on that anyways.” Membership prices for the 5i Research site haven’t been finalized, but Hodson says he doesn’t want to freeze out lower asset clients with high fees. He plans two pricing options: one providing access to the research database; and a higher service offering answering more specific questions. The basic membership may come to market under $100 per year.

“Some people have told me that’s too low; Sprott’s been very good to me financially,” he says. “I don’t need 10,000 customers on day one. It’s not going to kill me if I don’t get any business in the first six months.”

In the early stages, the company will rely on new analysts seeking experience in the field. Hodson says he will “trade guidance and experience for cheap labour.” Eventually, he plans to have a full-time staff of five or six experienced analysts.

Will the lack of experience be a hindrance to research quality? He doesn’t think so, considering the quality of existing research.

“If you look through the research of the sell-side analysts, they’re pretty bad at updating their reports and target prices,” he says. “I can’t say for sure that we’ll catch the next Sino-Forest, but I can say that the next Sino-Forest won’t be the one paying us.”

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.