Word on the street: scandal-ridden investment houses are leaving gaps in the financial market, and savvy entrepreneurs are jumping at the chance to fill them. How will this trend shape the new face of Wall Street?

Entrepreneur, Jan, 2005 by Joshua Kurlantzick

Sanders, too, has found a niche, which is crucial to smaller investment houses. Sanders International focuses on affluent young women, whom she believes are still treated shabbily by larger, male-dominated Wall Street firms. "They talk down to [women investors] all the time. We never do," she says. Today, Sanders manages over $80 million in client assets, and 50 percent of her customers are women, a high figure in the industry.

Some small financial companies will benefit directly from the big firms' $1.4 billion settlement. As part of the fine, the 10 big investment houses will pay roughly $450 million for independent research not tainted by ties to brokers and investment bankers. As further punishment, the 10 big boys will be required to post the independents' research on the big firms' own websites, a kind of free advertising for entrepreneurial investment firms. Already, a group of five small investment research houses have banded together, forming a consortium called Best Independent Research, to provide research to the big firms' sites and toll-free investor hotlines. Meanwhile, the Bank of New York has signed agreements with more than 150 independent suppliers to distribute their research.

Though other small companies may not benefit directly, smart entrepreneurs have used the big firms' troubles to convince clients that small research is better. "We're so different from the Wall Street firms because they make money selling stocks, and we only make money doing research," says Chris Hackett, who started his own firm, Greenwich Investment Research Inc., in December 2001 out of his Greenwich, Connecticut, home. To show he stood behind his work, unlike the larger firms, Hackett took a bold risk. From the start, he invested his own money in the stock picks his firm touts. "I put my retirement funds, my investment for my kids, into every piece of research we do, and we stay in that position alongside our clients," Hackett says. "When you're betting your own money, you really don't want to make a mistake."

Hackett focuses on high-end professional investors, including some of the biggest mutual and pension funds, selling them his intensely detailed research reports--dense 20- to 30-page documents he compares to "a thick issue of The Economist"--for a fee of $20,000 annually. Hackett also does extra, tailored, follow-up research on any stock for a customer. "We wouldn't want to get too big-it's really important that we have a direct relationship with clients," Hacker says. Still, "Hackett's Special Situation Report" has proven profitable enough that the two-person firm recently added a marketing expert.

Hackett believes his research is simply better. "We look for anomalies in the market that bigger firms miss," he says. Hackett points to CenterPoint Energy, a Houston-based power corporation, as an example. "Everyone on Wall Street hated [CenterPoint] last year. It was at $5 a share because they'd done some stupid things on their balance sheet," he says. "But amidst the mess, they had strong earnings. We went against everyone from Wall Street--my dad's own stockbroker told him not to invest with me in it. But it was a nobrainer." Today, CenterPoint trades at nearly $11 per share, and clients of "Hackett's Special Situation Report" reaped huge profits.