Filling a Void in the Wake Of the Research Conflict: Charles Schwab’s SoundView buy creates a hard-to-replicate business model based on independent research.

In a move that fills a real need for independent research following the financial community’s investment banking/research scandal, the world’s largest discount broker, Charles Schwab Corp., expanded its stock coverage capabilities by picking up SoundView Technology Group, an investment banking boutique, in a $345 million cash deal in late November. SoundView’s small investment banking business would be spun off before the deal closes, leaving the institutional research and trading capabilities that Schwab was eyeing. An answer to investors’ prayers, the deal is certain to displease competitors but please institutions looking for truly independent research, especially since Wall Street has had to cut back on analyst coverage in the wake of the scandal. Schwab itself is a target of a recent investigation into the financial services industry which focuses on illegal or questionable trading practices at a number of mutual fund and brokerage firms. Schwab recently disclosed in its quarterly filing with the SEC that New York State Attorney General Eliot Spitzer and the SEC are checking into allegations of market timing and illegal late involving several of its funds. Nonetheless, Schwab is not letting its involvement in the mutual fund probe disrupt its plans to augment the modest, computer-driven research operation it launched in May 2002. That business has achieved mixed results, say industry followers. Commenting on its SoundView acquisition, Schwab has stated that it would have taken years to build an internal research team like SoundView’s. SoundView follows a couple hundred media, technology, telecom, health care, and aerospace and defense firms, and Schwab has said it will consider covering other industries as well. Future acquisitions could target other independent research firms that focus on non-technology sectors, industry experts have said. The company may also look to bolster its wealth management division, U.S. Trust Co., or add individual investor or retirement investment capabilities. “What Schwab has created is so unique that there aren’t many firms that would be able to replicate it, says Steve McLaughlin, Managing Partner of Financial Technology Partners, the lead adviser to SoundView. “There aren’t too many pure brokerage and equity research firms without significant investment banking businesses attached, so any of the top institutional firms would have to abandon huge and very profitable investment banking businesses in order to accomplish the same kind of structure as Schwab/SoundView – and I wouldn’t count on that happening, ever,” he adds.