The Rules Don't Apply To Stock Analysts

Does Your Broker's Recommendation Coming 

With No Accountability?

                                                                          by: Brendan Magee

I am in the midst of reading a very informative book, "Brokerage Fraud, What Wall Street Doesn't Want You To Know," written by Tracey Pride Stoneman and Douglas J. Schulz, and I like to share an interesting tidbit I picked up in my reading.

I think all investors realize to one extent or another that the investment industry's objectives and the investing public's agenda are in conflict with one another. The investor wants the truth on what is the best way to invest their money, keep costs down, take as little risk as possible, and get a decent rate of return. The brokerage industry wants to be profitable. They want you to buy the stocks, bonds, mutual funds, and investment products they sell. To accomplish this, they need to get your attention and make their products look irresistible. However, investors want to be advised, not sold. They want the inside scoop on what is going to do well and what is going to tank.

The brokerage industry's response is to offer investment analysis. They hire analysts to track stocks, different markets, and spot trends that will give their investors the edge. In Brokerage Fraud, Schulz recalls in his days working for Merrill Lynch that on every Monday morning there would be a conference call played throughout the office's p.a. system, where Merrill's analysts would list the stocks, companies, markets, and market sectors they were recommending the brokers to sell and investors to buy. That particular week, these were the recommendations the brokers were going to make to their investors. The analysis gave the broker's recommendation a layer of credibility that would make it easier to sell to their investors.

Stoneman Pride and Schulz write, "One little known fact that isn't made readily available to most investors is that, generally, research analysts that work for the brokerage houses do not have any accountability. Where a stockbroker must have a "reasonable basis" for recommending a stock or investment to a customer, no rules or regulations dictate what an analyst says or what must be in a research report. No securities rule or regulation applies to the analyst because they do not hold a securities license. They operate with relative impunity."

So if the brokerage house has been hired and paid hundreds of thousands of dollars to sell the stock of a publicly traded company, what do you think they are going to want their analysts to say about that particular company? Is the brokerage firm going to continue to have a profitable relationship with the company if the analysts use language like "buy, attractive, hold long-term or sell, dump, get out?"
This puts the analyst and the brokerage house in the position where the truth might serve the investor's best interests, but not the brokerage house's profitability.

Perhaps,  if investors understood their broker's recommendations were coming from someone who is perhaps more beholden to the firm then the investor and that no rules or regulations apply to analyst's recommendations, they might not put as much faith in their broker's advice.

So as Stoneman Pride and Schulz say, "Buyer Beware!"

Brendan Magee is the president of Inevitable Wealth Coaching. With questions or comments call 610-446-4322 or e-mail Brendan@coachgee.com.