UNITED STATES INVESTORS STILL NEED TO BE CAREFUL WITH RESEARCH ANALYST BUY RECOMMENDATIONS

Sell recommendations by investment analysts working on Wall Street are still a rarity years after FINRA banned Jack Grubman of Citigroup and others who issued buy recommendations on technology stocks they privately considered to be "pigs," in order to reap personal financial rewards for generating more lucrative investment banking business for their firms ("Analysis: Research "sell" notes decline as conflicts persist," Reuters). The SEC fined the industry one billion dollars and Congress forced the SEC to impose rules to clean up a fraud that still exists on Wall Street.

Today, worldwide, only 9 percent of analyst recommendations issued by investment banks and brokerage firms are "sell" recommendations. Data from Thomson Reuters shows that just 6 percent of the recommendations in the United States were "sell," slightly more than the 3 percent level that persisted before and during the tech bubble, according to the article, citing a study published in the Journal of Accounting and Economics.

The percentage of sell recommendations dropped back down into the single digits after jumping to nearly 20 percent immediately after rules were imposed to eliminate the analysts' conflict of interest. Despite "Chinese Walls" that were supposed to restrict communications between analysts and investment bankers, and despite rules prohibiting an analyst's compensation from being tied to investment banking revenues, conflicts persist.
Analysts with negative views on stocks often keep those beliefs to themselves because of pressure from top bankers seeking business from the company or fear of being ostracized by senior executives.

"Research is associated, rightly or wrongly, with an organization and, if somebody puts out a sell recommendation people don't like that," David Baran, co-founder of Tokyo-based hedge fund, Symphony Financial Partners, was quoted as saying, adding: "In general it's difficult for a lot of the analysts who could be negative or negatively biased on a company and expect to see them welcome at the next investor meeting or get access to the management."

Thus, investors still need to be skeptical of research analyst "buy" recommendations.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

WATCH OUT FLORIDA INVESTORS--TOO MANY FINANCIAL ADVISERS THROUGHOUT THE UNITED STATES FAIL TO ACT PROFESSIONALLY!

Investors sometimes hire a financial adviser to manage their money professionally if for no other reason than to escape their own irrationality. Many investors know that, in investing, their emotions can be their worst enemy - leading them to buy high and sell low. They think that a financial adviser, detached from their emotions, will behave more rationally and act in their best interest. Unfortunately, a recent undercover academic study concluded that many financial advisers are too detached from their clients and too attached to their own financial interests to provide professional financial guidance. ("Financial Advisers Flunk Undercover Sting," Ryan Sager, SmartMoney.com).

Economists from Harvard, MIT Sloan School of Management and the University of Hamburg hired and trained a group of actors and turned them loose to make 300 visits to Boston-area financial advisers, posing as clients and presenting various portfolios for review and analysis by the financial advisers. This occurred over a five-month period in 2008.

For some reason, the economists expected that the advisers would exhibit "catering behavior" - complimenting their new clients on their portfolios to build rapport and advising them to stay the course. What they found was very different.

"[T]hey largely found that the advisers were willing to recommend big changes fairly quickly." "Most strikingly, the advisers nudged people in low-cost index funds toward high-fee actively managed funds -- blatantly making their clients worse off. Presented with the index-fund portfolio, the advisers recommended a change in strategy more than 85% of the time. Meanwhile, advisers largely encouraged returns-chasers to keep chasing returns."

The economists concluded that the lesson to be learned from all of this is that it is very important for investors to understand how their financial adviser is getting paid. If they are making money from commissions and fees from selling products, they are incentivized to push those products whether they are appropriate for their client or not, a clear conflict of interest. Financial advisers may overcome this incentive and recommend, say, an index fund that pays them next to nothing, but 85 percent of them in the study did not act in their clients' best interest.

Unfortunately, the authors observed, most of us are no better at picking advisers than we are at managing our money.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.