Will investors benefit from independent stock reports?

A new era is about to begin for small investors. For years, Wall Street's dirty little secret was that its research was devised expressly for two key constituencies: institutional investors and corporate clients. Individual investors were left out.

Now, as part of a $1.4 billion settlement approved by a federal judge Friday, 10 of Wall Street's largest brokerage firms will soon offer investors free independent stock research alongside their own.

Within the next few months, each firm will be responsible for selecting as many as three additional reports from independent providers for each piece of research it generates. All reports must then be made available to retail investors. As a result, for the first time, small investors will be assured of receiving multiple opinions on stocks, something long available to the well-connected and more lucrative institutional clients of the banks.

While this will mean more research, according to some critics, it does not necessarily mean better information.

"There's no guarantee that only quality research will distributed," says Chuck Hill, research director of stock-tracking firm Thomson First Call. "In fact, the danger here is that [research reports from] some of these fly-by-night firms might slip in and get distributed."

As punishment for their past sins, those 10 firms will pay $450 million over five years to finance and develop the pool of independent research. This "pot of gold" has led to the establishment of a slew of firms over the past year.

"When you put this much of an incentive out there, you're going to attract all kinds of competitors," says Mr. Hill. "Some of them will be reputable, but some of them won't be."

Independent research is a somewhat fragmented segment of the financial industry, with about 100 relatively sizable firms and perhaps several hundred others that have just a few people. In just the past six months, dozens of new firms have set up shop, hoping to be among the main suppliers of independent research to Wall Street.

But just because research is independent, doesn't mean it's good. Quality will vary from one supplier to the next, and even from analyst to analyst. In addition, some of the better research boutiques may refuse to make their reports available because their institutional customers pay top dollar and will not want to see them handed out to the general public.

A bigger problem, says Hill, is that some firms covered under the settlement may intentionally provide subpar research, making their reports look better by comparison. "If I'm one of the settlement firms, my incentive to provide the best-quality research is not really there," he says.

But the Securities Industry Association (SIA), the trade group that represents the largest firms on Wall Street, believes that the settlement will ultimately lead to better - and more objective - data.

"I don't think it would be in the interest of a firm to provide investors with research that the firm itself doesn't think is good quality," says George Kramer, the SIA's general counsel. "Investors tend to get mad when they receive research recommendations that don't pan out - as we all know. So I think it's highly unlikely that a firm would consider it an attractive business model to provide that kind of research."

But even with the laundry list of structural reforms designed to end Wall Street conflicts of interest, many Main Street investors remain nonplussed.

"I have no faith in Wall Street," says Lucille Merchant, a Philadelphia high school counselor who lost a huge chunk of her retirement savings on tech stocks. "There is no one there to protect you."

Even the SIA acknowledges that many investors still feel burned by Wall Street. "There's no question that all of this bad publicity over last few years was not good for the industry and was not good for research," says Mr. Kramer. "We think these reforms will address that."

But the SIA and state and federal regulators appear almost alone in that point of view. "It's a severe trust problem," says Scott Cleland, chairman of the Investorside Research Association, a trade group made up of 50 independent stock-research firms.

Mr. Cleland believes the settlement will actually further entrench the conflicts on Wall Street. "Because 95 percent of investment banking research today is funded by investment business, less than 5 percent of investment research is financially aligned with investor interests," says Cleland. "As a result, Wall Street research has been so discredited."