Expert Network

What Is an Expert Network?

An expert network is a group of professionals who are considered to be leading experts in their respective fields. These experts are then available for hire by third parties who need consultation or expertise on specific topics or skillset that fall outside of their general knowledge base, or as expert witnesses in legal or policy matters.

The investment industry, including hedge funds and mutual funds, is one of the biggest users of expert networks. Investment companies seek out the insights of certain researchers and experts in an attempt to gain a competitive advantage.

How an Expert Network Works

Expert networks are groups of Subject Matter Experts (SMEs) who are hired by firms in need of high-level expertise that their in-house employees are unable, or unqualified, to provide. Experts in these networks generally charge large fees in exchange for their services, and they can be hired through long or short-term contracts, on an as-needed basis or be held on retainer.

The experts may provide a subscription- or transaction-based fee model. In the subscription-based model, the firm will access have regular access to experts for a flat fee. The experts are then paid an hourly rate by the expert network company for work completed. The transaction model is where the expert network charges firms for each interaction with the expert. The expert is paid an hourly rate.

In both of the fee models, the expert network company makes money on the difference between what they charge the client and pay the expert. An independent expert will set their own rates, but will likely still work under one or both of these models.

The expert network may have experts as employees, or the experts may simply be contracted or have freelance arrangements with the expert network company.

Special Considerations

While many investment companies utilize expert networks to garner more in-depth information surrounding potential investment opportunities, they can be used by anyone looking for someone with unique or specialized information.

For example, a network news show may reach out to an expert network in search of a doctor who can consult on a new study or report that has been published so that they can understand how to correctly report the findings. If none of the reporters or staff writers possess a medical degree, a doctor could be hired as a SME to explain the study and help the producer craft the news segment around it.

Expert Networks and Investing

Expert networks most often are used in investing. They started becoming popular around 2000, and the phrase was introduced in 1997.

They fell out of favor briefly around 2009 when some experts within the networks provided inside information to clients, who then made transactions based on these tips. Since then, regulations have tightened around what specific types of information experts are permitted to give to the firms that hire them, and the permissible uses of the information received.

To help avoid compliance issues, some expert networks don't allow their experts to work for publicly traded companies of which they may have insider information. This avoids the possibility that the expert could accidentally or intentionally leak that insider information to their clients (user of the expert network).

In a competitive world, experts and expert networks are in constant demand, with the appetite for information re-emerging shortly after the 2009 issues.

Example of an Expert Network in Finance

Consider as an example a hedge fund that is interested in buying a pharmaceutical stock that has just received approval from the Food and Drug Administration (FDA) to begin selling a new heart medication. Since the hedge fund employees likely don't have a background in pharmaceuticals or medicine, they hire a SME from an expert network to help them understand the potential market impacts of the heart medication and what it might possibly mean for the company’s profits. They may be interested in knowing things like how many people could use the medication, are their side effects that could cause legal trouble, and are there other competitors in this space already?

The SME typically offers an inside view of the medication, explaining how it works differently from other medications, and helps make predictions regarding the demand for the new medication. This provides the hedge fund a better understanding of the potential value of the company offering the new product. The hedge fund is then in a better position to determine if they want to buy the company's stock, at what price, and what the stock could eventually be worth.