If you haven’t had a call from your stock broker lately, I have some information you might want to use next time they ring offering their newest recommendation.
Alternatively, if you’re in the habit of buying shares based on analysts’ recommendations, this is something you also need to keep in mind.
A new academic study, “Inside the ‘Black Box’ of Sell-Side Financial Analysts”, by Lawrence Brown, Andrew Call, Michael Clement and Nathan Sharp, brings into question how relevant the average investors’ interests are to those who are recommending they buy shares.
The study was comprised from surveys of 365 analysts in the US and it revealed those analysts are not greatly interested in accuracy.
Only 35% of analysts regarded the profitability of their recommendations as important to their compensation.
Nor are their employers interested in the average investor.
13.3% of analysts rated retail brokerage clients as very important to their employer and 51.5% of those analysts rated retail brokerage clients as not important at all!
Their love is saved for institutional investors, with over 80% of analysts rating hedge funds and mutual funds as very important to their employer.
This is because broker votes are the most important consideration for analysts and their employers.
Broker votes are essentially where institutional investors (the big boys) direct their trading based on the quality of service they receive, something that generates big income for analysts’ employers.
This quality of service doesn’t revolve around accurate forecasts, but how much access analysts have, and can provide institutions, to company management.
And dubiously, this access to company management often depends on a good analyst rating.
The other reality, brokers and investment banks help companies raise money, merge, or spin off parts of their company.
Positive analyst recommendations often cater to wining business from these companies.
It might be a big club, but it’s important to remember – you aren’t in it!
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances. Looking for the best financial adviser in Australia? We think we’re it.
