(Bloomberg) -- They may be cutting research budgets, but European investors are more willing than ever to dole out up to $1,300 an hour to talk to someone who can give them an edge.
Now that banks have stopped giving equity research for free under a new European Union law, some money managers are opting instead to spend their cash speaking with experts in fields as trendy as artificial intelligence or as niche as sausage packaging.
Not even a decade ago, the matchmaking firms—called expert networks—that paired Wall Street with industry whizzes were marred after some of their U.S. hedge fund clients traded on confidential information they’d obtained from experts and ended up in jail.
But after years of bolstering compliance and rebuilding their brands, expert networks have shaken off that stigma, especially as crisis years become a distant memory. First they made inroads in Asia, and now as business booms in the U.S., they’re taking on Europe.
“They seem to be contacting everyone like mad,” said Phil Chapple, the chief operating officer at London-based hedge fund Monterone Partners, who at some points this year was getting at least two calls a day from networks trying to sign him up. While they used to look expensive, “now if you look at some of the pricing coming out of banks, it does get into the table more,” he said.
The likes of Gerson Lehrman Group, the dominant American expert network, and European rivals Third Bridge or AlphaSights all compile their own private databases of consultants from around the world. Some basic packages charge $100,000 per company for the service of pairing employees with the right experts, which can be topped up if they need more phone time. Fees of the most sought-after consultants give high-flying lawyers a run for their money.
Expert networks in Europe are gaining traction due to the law, called MiFID II, that requires EU investment banks to charge explicitly for research instead of bundling it into brokerage costs. The European Securities and Markets Authority and the Financial Conduct Authority of the U.K. declined to comment on the trend.
The revised rules, enacted Jan. 3, have forced investors to try to get more bang for the dwindling research buck.
That’s where people like Hermann Plank come in.
“I can provide some of the financial institutions information in five minutes that takes them weeks and months to acquire through their due diligence and data analysis,” said Plank, a plastics expert who says he’s in the top 5 percentile of revenue earners for GLG, which has about 50 percent market share and one million experts.
Plank gets about three calls a month as a side gig while running a consultancy TecnoKal LLC out of Scottsdale, Arizona. He’s helped companies like Becton Dickinson and Co., Unilever Plc and Pfizer Inc. develop products from disposable razors to artificial kidneys in the past three decades.
He’s been consulting in this way since 2005 and says even though experts may be privy to confidential information, they know where the line that separates legal from illegal is.
Experts officially get trained on what constitutes so-called material non-public information: big upcoming acquisitions, planned store closures, the results of a pharmaceutical trial that scientists haven’t released yet are all clear no-nos. Plank fills out regular compliance surveys for GLG and signs contracts promising not to divulge anything sensitive.
Yet the worst insider trading scandal in U.S. history showed rules can be broken. Some 95 people were convicted in the crackdown by federal prosecutors in Manhattan and the FBI in New York starting in 2009, including fund managers, analysts and employees at public companies who were moonlighting as expert-networking consultants. For the extra fee paid to speak with an insider instead of an analyst, they demanded an edge.
In an egregious example, former SAC Capital fund manager Mathew Martoma was sentenced to nine years in prison in 2014 after trading on secrets about an experimental Alzheimer’s drug he learned from Dr. Sidney Gilman, a neurologist he met via GLG. SAC made profits and avoided losses of more than $275 million when the unsuccessful drug trials became public.
“There’s no question that expert-networking firms can be misused by securities traders to obtain material non-public information from company insiders,” said Arlo Devlin-Brown, a former federal prosecutor in New York, who handled insider trading cases. In Europe, “the securities industry would be well advised to use expert-networking firms who have strong reputations and compliance programs to protect themselves.”
While middle men like GLG were never accused of wrongdoing in U.S. cases, most have since invested millions of dollars in compliance systems and training to prevent consultants from breaking the law. For instance, experts will still get paid if they hang up the phone because they feel uncomfortable with the line of questioning and they’re forbidden from exchanging contact details.
Expert-networking companies are seizing on MiFID II to boost their presence in Europe, with GLG Managing Director Laurence Herman seeing an opportunity to step in if banks scale back coverage of small and medium enterprises.
Some are wary about the industry’s spotty history.
“Previous scandals definitely shook my trust in these expert networks,” said Sherban Tautu, who advises clients of SYZ Wealth Management in Geneva on how to invest $1.2 billion in hedge funds. “I clearly prefer funds not to use expert networks, but if they do, I want this to be well managed and monitored.”
Others are big fans. Leonardo Marroni found them particularly useful in understanding central bank policy when he worked at hedge fund GLG Partners in London, although his current employer—hedge fund Devet Capital—doesn’t use them.
“Sometimes you’d get the feeling that if a central bank had a hawkish or dovish stance at a press conference but they feel markets didn’t pick it up, they might press this stance” with an economist working for an expert network, who would then talk with hedge funds or investment firms, Marroni said.
With fund managers slashing outside research budgets by 20 percent, the competition with conventional research could intensify.
Hermes Investment Management, which allocates almost 33 billion pounds ($46 billion) of client money, started using expert networks a couple of years ago for niche perspectives on areas like geopolitical risk, urbanization and automation. But “it would be dangerous and probably somewhat foolish to rely on them solely without additional work yourself,” investment chief Eoin Murray cautioned.
For experts, it’s a sweet deal. They earn about $300 an hour (some many times more) to talk about what comes most natural to them. Laurie Wilson, for instance, worked as an executive at Macy’s for more than 20 years and she now runs her own consultancy in New Canaan, Connecticut.
She works with three networks and typically gets a couple calls a month from hedge funds, private equity companies and consultants wanting to know whether brick and mortar retailers can survive the onslaught of online competition. But the potential risks of insider trading are never far from her mind.
“I have them hammered in my head,” Wilson said. “I always veer on the side of safety and tell them I can’t answer that question and move on. It doesn’t happen a lot.”
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