Sunday, July 09, 2006

Brokers, analysts, advisors, investment bankers, private bankers etc cannot be trusted

Why do brokers provide research service to their clients? Brokers, or analysts (from sell-side brokers), or investment bankers or private bankers for the matter, thrives on activity. Activity is their friend, and is what drives their profits. For every trade that you make, they will take a cut, regardless of whether you are buying or selling.

Now bearing this in mind, does it make sense for research analysts, working for brokerage firms to make a BUY recommendation and do nothing for the next 5 to 10 years? So, in a sense, research analysts from sell-side can only make short-term calls, to generate churning. They may not realize it, they may genuinely want to analyze companies and give their client good advice, but the system is in place for them to generate churning.

In the markets, to make short-term calls is like throwing a coin and then trying to guess whether it is heads or tails. Research estimates that investment professionals are right 40-50% of the time. The best guys are right 60% of the time. Trusting an analyst to make a correct short-term call is as good as trusting a monkey to throw a dart on chart to determine a stock's target price.

Having said that, brokers are good for information and flows, so use them for that. As far as they want to project an image that they are on our side, we must remember that their interests and ours are not aligned. We must be careful not to let them suck away precious returns in the form of transaction costs.


  1. based on the average trading amount of $1billion on SGX daily, the yearly brokerage paid by retail investors (assuming 0.275% comm) is about $660million. If we can just ignore these noises from the analysts and hold our position for the long term,we can collectively save a significant amount over the years. However, to some, it is simply too tempting to ignore the fictitous target prices set by the analysts, often times, supported by wonderful projections. For many who were burnt, I reckon they would like to give these analysts their own finger projection.

    Then again, nobody forces these ppl to buy and they have no one to blame but themselves. I read on today's Business Times that there were some retail investors who are giving their brokers permission to trade on their behalf just so that they will not miss the boat or next "wave"! Ppl who like to play with fire shouldnt cry when they get burnt. Dipping in and out of stock will, at best, make you some coffee money.It will never make you a fortune.

  2. Thanks for the info, webctm, indeed brokers and the whole lot of financial advisers ought to relook at the value of their existence. And investors ought to think twice before they trade after hearing the latest recommendation from their brokers.

    Sadly, in my humble opinion, investors have already lost to the brokers, the system is in place to make investors trade, and they willingly do so. The brokers are already so powerful and will continue to be even more so. It will be some time before investors wake up.