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With all the talk about independent research on Wall Street these days, you'd think that it was a panacea for the markets and shattered investor confidence. Not so fast.

The independent research game is full of nuance. For starters, the performance of independent research -- derived from firms without investment banking ties to the companies they cover -- is mixed; independence may not necessarily produce better stock picking. It's also unclear whether investors will pay for independent research, or even read it if it's widely available. And some people don't even agree on a definition of "independence": Is a brokerage firm that doesn't have investment banking ties, but makes a market in the stock, independent? Is a separate division of a company truly independent if, as Citigroup proposes, it still reports to the CEO who oversees every other part of the firm, including investment banking? Is a report independent coming from a firm that provided no investment banking services but received IPO shares as payment for research, as was the case with the much-lauded Sanford C. Bernstein?

But for now, the answers to those questions are on the back burner. Independent research is the alleged cure-all for those lofty "strong buy" ratings on stocks clearly headed toward zero. New York Attorney General Eliot Spitzer has proposed a Wall Street settlement calling for firms to invest $1 billion over five years to distribute independent research along with brokerage house reports. And he wants all recommendations provided to a public database maintained by the SEC or another regulatory agency 90 days after they are issued, so investors will have performance-based data to evaluate analysts.

Many companies have been resisting, especially firms not on Spitzer's hit list. Other firms such as Citigroup, which is separating its research and investment banking divisions, are open to changes so they can close the book on bad press. Merrill Lynch settled with Spitzer and instituted new disclosure rules and other fixes.

Other possible solutions include linking analyst compensation to research accuracy and rebuilding a Chinese wall to insulate the research department. But no solution is perfect, and some argue that cures may be worse than the illness. "We have no interest in the government and Wall Street getting between us and our investors," said Scott Cleland, CEO of the Precursor Group, an independent research firm.

Cleland may be in the minority in that one. Independent researchers such as Morningstar, ValueLine and a host of smaller shops could benefit by dancing with Wall Street. TheStreet.com, a Web site known mainly for financial news and opinion, formed an independent research company, Independent Research Group, headed by a former J.P. Morgan H&Q analyst.

And research distributors such as Multex could pick up business, along with newer Internet offerings such as Starmine.com and Investars.com, both of which rank analyst performance.

But are independent picks more accurate than those coming from a big investment bank?

"We haven't seen any evidence that makes independent research better on the firm level," said David Lichtblau, vice president of marketing for Starmine. "In many cases it's that analyst -- not the firm."

A Starmine study shows that analysts with investment banking ties to a company have more accurate earnings estimates than independent researchers. But according to data from Investars, only one of more than 100 analysts on Institutional Investor's 2000 and 2001 first-team list ranked first in stock picking. Indeed, about 40 percent were below average when it came to stock picking.

"In general, independent analysts have done better and do outperform," said Investars CEO Kei Kianpoor.

Lichtblau does note that analysts whose companies have done investment banking tend to be a little more optimistic than their peers; underwriting clients are usually get some sort of "buy" rating. However, analysts who are chummy with the companies they cover have better access -- a factor that institutional clients value more than an analyst's ability to pick specific stocks, according to Institutional Investor's most recent survey.

Experts say investors should focus on specific analysts, no matter what firm they work for. Good analysts work for firms with conflicts of interest as well as independent companies.

"I don't think independents are necessarily better," said Joel Morse, associate dean for research and outreach at the University of Baltimore's Merrick School of Business. "Analysts at the big houses have just as much reason to boost their reputation and establish a customer base."

Spitzer doesn't agree. In prepared remarks at a recent dinner honoring star all-star analysts selected by Institutional Investor, Spitzer questioned their stock picking prowess.

"Those named to the All-Star team are turning in lackluster performances," said Spitzer. "The advice of analysts not chose would very often have been more profitable to individual investors."

Kianpoor, who has testified before Congress about analyst conflicts of interests, said the best way to rate analysts is create a portfolio based on their ratings. For instance, a market perform rating won't add stock to a portfolio, but a buy will add shares. Upgrades will add more shares. If an analyst is right, the portfolio goes up. If he's wrong, the portfolio falls.

The mock portfolio can be a good indicator of who you can trust, but big brokerage analysts do appear on the top rankings. Although some independent firms such as Callard Asset Management and Global Asset Management rate highly, so do other brokerage firms such as Goldman Sachs and Bear Stearns.

For widely-held Cisco Systems, Dresdner Kleinwort Wasserstein has made the best calls producing a return of 26 percent, according to Investars. Needham is second and a pack of three traditional firms are tied for third. Market Profile Theorems and Callard Asset Management are fourth and fifth, respectively.

Kianpoor said Investars' goal is to objectively measure research performance and be a resource to both Wall Street and individual investors, who can pay $19 a month for access to Investars data.

"We just want transparency," said Kianpoor, who noted that investors have to be educated about conflicts.

Spitzer said transparency is sorely lacking on Wall Street. "It was surprisingly difficult to gather the data necessary to objectively measure analyst performance," Spiter told the Institutional Investor audience.

In the meantime, individual investors have to do their homework, watch conflicts of interest and find research aligned with their interested. And even then there are no guarantees. "Independence enables good research, but doesn't ensure it," Cleland said.

Finding a fix

Spitzer's independent commission on research funded by brokerages may work for a few years, but once the requirements are met, it's unclear whether investors will pay for good research, said Jennifer Bethel, associate professor at Babson College and formerly chief economist of the Securities and Exchange Commission's division of corporation finance. But investors need a level playing field so "they know what they are looking at," Bethel said.

The New York attorney general realizes government has a fine line to walk. "Government should not and cannot tell investors how to invest their savings, but government cannot sit idly by when banks are deceptively marketing dishonest advice to investors," Spitzer recently said. "Investors may sometimes act unwisely, but those impulses do not excuse the industry from its obligation to provide investors with conflict-free advice."

Bethel, who worked for the SEC from 1996 to 1999, advocates more stringent disclosure rules to help investors sort through research. Both independent and sell-side research has value, but there are tradeoffs between bias and information, she said. Sell-side analysts may have access, but conflicts. Independents may be locked out of information.

"Sell-side research was never independent -- that's why the buy side always has its own analysts," Bethel said. "To me it's a disclosure issue. We are taking a lot of evils and attributing them to analysts."

Cleland, a founding member of the Investorside Research Association, believes 95 percent of Wall Street research is conflicted in some fashion. Yet he argues that the market, not the government, can regulate the industry simply by sorting out bad research through investor education, truth in advertising and increased disclosure. Other industry watchers agree reform is needed, but remain wary of government intervention.

In a perfect world, there would be standard tools tracking the effectiveness of research. Analysts could then be compensated based on the effectiveness of their research. Investors would be able to find out what research firms are the best for their portfolios. And the media, which helped make stars of the "strong buy" dot-com loving crowd in the first place, could choose their sources based on stock picking prowess.

It may take awhile, but in the end, there would be less conflict and the best analysts would be rewarded accordingly. Even brokerage firms would benefit -- if they were ranked among the most accurate.