The wonderful world of broker conflicts

A reminder today from Reuters on the perils of being a research analyst at a brokerage firm.

The guts of the story:

  1. JP Morgan equity strategists downgrade Indonesian stocks to underweight
  2. The Indonesian finance ministry takes offence and stops using JP Morgan as a primary dealer for its government bonds
  3. JP Morgan upgrades Indonesian stocks to neutral
  4. Everyone lives happily ever after

Now I’ve seen lots of cases where companies “blacklist” analysts who put a sell recommendation on the stock, not allowing them into company presentations or to dial-in to conference calls. I’ve even heard of a case where a company tried to sue an analyst for libel.

But this is a new one. Strategists are generally a little safer from conflicts of interest, but this time they weren’t. I’m guessing there were a lot of angry meetings (phone calls and emails are recorded…) between the bond desk and the equity desks discussing how much money had been lost by the bond desk because of the research.

And that is why most fund managers ignore broker recommendations completely. Don’t get me wrong, fund managers read broker research, talk to analysts and quiz them on their views. There are a lot of bright analysts with interesting insights. And you learn to read between the lines. The problem is that you never know what pressures (both within the brokerage firm and from outside) have been put on the analyst to come up with the final recommendation.

Damien Klassen is Chief Investment Officer at the MB Fund launching in April 2017. Register your interest now (if you haven’t already):

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Comments

  1. Know IdeaMEMBER

    That is funny. Watch not what they say, but what they do.

    The weight placed on the published material reduces, and the weight placed upon informal confidential briefings increases. Which then means it comes down to who you know and how often you talk to them in absence of a recording. Sounds familiar.

    Best keep an eye on those insider trading rules.

  2. Even StevenMEMBER

    So true. JP Morgan are gutless wonders. Way to undermine your reputation. Not that sell side analysts had much of one anyway…

  3. This is natural activity across the FIRE sector. It is not usually so openly displayed,

    The ratings agencies do this all the time.

  4. Or the conflict of interest with a blog writing about brokers, starting a new fund now competing with other brokers… 😛

  5. yrs ago the model was if the client made money, you made money,
    Now most run a strategy whereby they make money, irrespective of the client result, and if the client leaves, you go find another sucker.