Research is like a water filter. Its purpose is to remove toxins and chemicals and turn out a clean product. But sometimes trace contaminants sift through, prompting brokers to refrain from drinking the water. One “contaminant” brokers frequently cite is the corporate finance department.
“Anyone in this business realizes the research department has a heavy responsibility toward the institutional clients and to corporate finance,” says a West Coast broker with CIBC Wood Gundy. “I can look back on Wood Gundy research and I cannot honestly say there has been a pattern of research being tailored to underwritings,” he adds.
Other advisors are not so diplomatic. One Toronto broker at RBC Dominion Securities Inc. calls corporate finance “a bunch of whores.” And aScotiaMcLeod Inc. broker from eastern Ontario complains that the research department at his company “spends too much time holding finance’s hand.”
The complaint seems to be as old as the business itself.
Yet, looking at the scores advisors at Canada’s 10 national investment dealers gave their firms this year, the industry average for research sits at 7.7, up from 7.2 last year. Of the 10 firms polled, seven of their scores made improvements over last year. This could lead you to believe research is making a comeback – although not everyone shares that view.
“Do you think a broker’s answers on how good his firm is cab be ub any way related to how the market is functioning?” asks an investment advisor with Canaccord Capital Corp. in Vancouver. “When the market is upside down, everybody seems to hate the place they work for. But when it’s booming, people forget about that because they come in and the phones are ringing and they’re making money.”
Is this year’s booming market, then, solely responsible for TD Evergreen Investment Services Inc.‘s impressive rise to a 7.8 from a 7.3? Or ScotiaMcLeod’s gain to 7, the first time it’s had a B since 1997? Edward Jones Canada also had an improvement of 0.2 points to sit in top ranks at 8.8. However, the most impressive change comes from Merrill Lynch Canada Inc., with a whopping 1.1-point increase to 8.5. from 7.4.
Or are brokers becoming more tolerant? In fact, the veteran brokers among the respondents take a more philosophical view. Take a Wood Gundy broker with 20 years’ experience. He believes that he shouldn’t have to follow a Toronto analyst’s opinion blindly. The final decision to buy a product is his. “So I don’t have a whole lot of sympathy for people who start crying the blues, saying research is bad because it’s somehow tied to corporate finance. I’m not buying into that argument at all,” he says. “We have to accept responsibility for ourselves.”
Not all brokers surveyed have 20 years’ experience. Yet with 9.1 years as the average, you would think brokers know the dance between research and underwriting. Edward Jones Canada brokers, with the lowest average years of experience at 3.7, ranked their firm highest in research. In contrast, Wood Gundy advisors gave their firm’s research bottom ranking with a 6.9, and they topped out with 13.3 years of industry experience. Is this a case of the older you get, the more tolerant you become, or a coincidence?
Even with the improvements this year, the industry only rates a B. And almost every broker polled said he or she uses outside sources on a regular basis.
A Nesbitt Burns broker in Ottawa says the Internet has created more research options. “Information comes at a much more spontaneous time. In the past, investment advisors were the only ones receiving the news; now you just have to go to the various Web sites, click on the symbol, bang up a particular stock and get the news at the same time.”
But these capabilities bring their own set of concerns. Some brokers worry they could become obsolete. Others say their role is evolving, and the Internet is only one source of information and one that should be taken with a grain of salt. “I think the Net is used as an idea generator. My clients are investigating ideas I’m providing to them. They still come to me for my opinion or my firm’s opinion, but I try to take a balanced approach. I never rely on one source, and I don’t think clients do either,” says a Wood Gundy broker in Toronto.
That makes sense. If the wall between the research and corporate finance departments is as flimsy as some say, scooping information from every available source may be a broker and a client’s best defence.
In January, Nesbitt Burns introduced BMO Nesbitt Burns Gateway, a system through which clients can access account information via the Internet. This allows clients to monitor their portfolios on a day-to-day basis, watch transactions and catch errors.
The next step is to have clients implement their own transactions. Again, there would be less reliance on the broker, although a Nesbitt Burns’ Ottawa broker claims his opinion and experience as an advisor still command high regard from clients. But even if a firm’s research isn’t Evian-pure, with clients conducting their own research and taking more responsibility, the investment safety net will cover more ground.