Where brokers go for info

For the first time since Investment Executive began its Brokerage Report Cards in 1993, brokers have given their firms’ research a mediocre average score of 7.0. For the first time, no individual firm scored higher than 8.0.

But perhaps the brokers’ dismal view of their analyst colleagues should come as no surprise. In 1993, Canada’s bull market was just getting going and the outlook was rosy; this year Canada’s markets fared poorly compared with those in the U.S. and Britain and the mood is darker.

And why not heap scorn on the analysts? After all, it was they who foresaw the Asian currency crisis, the ensuing correction in July that touched every sector and the growth plays in technology stocks – and said nothing.

Spurned, advisors have turned to the Internet as their source of knowledge. Many told IE they now surf the Web for investment research, charts and independent analysts’ reports.

‘I read [internal research] all of the time, but I’d say I only rely on it half the time. I use the Internet extensively,’ says one Toronto-based broker for RBC Dominion Securities Inc.

No company comes close to earning high marks on research. Even Toronto-based Nesbitt Burns Inc., which has set something of an industry standard with its ‘Red Book’ of company reports, is described by one of Nesbitt’s advisors this way: ‘This year has not been kind to Canadian markets … but I guess we’re [among] the best of the shitheads.’

Advisors continue to be concerned about the limitations of in-house research. They complain that the ‘Chinese wall’ that should separate corporate finance from retail sales is riddled with holes. ‘You look at [our] research and that of all the bank-run firms, and it’s important that you offset that with a more independent approach or you run the risk of your client getting the impression that the bank-run firms give a biased opinion on research,’ says a seven-year veteran of CIBC Wood Gundy Securities Inc.

A Western Canada-based Nesbitt advisor is less diplomatic. ‘I stay away from [corporate finance.] They’re all bandits. They say there’s a Chinese wall separating corporate finance from retail sales, but I question it. I question everything.’

It’s not just bank-owned brokerage employees who share these concerns. Nowhere is the feeling stronger than among advisors at Vancouver-based Goepel McDermid Securities Ltd Advisors at the former retail brokerage McDermid St. Lawrence Securities Ltd. were so excited about their marriage with wholesale boutique Goepel Shields & Partners Inc. that they vaulted their firm to the top spot last year. Alas, says one broker there, ‘since the takeover, Goepel does our research, and they are not geared toward retail clients, more toward institutional.’

‘I use the Internet’

Montreal-based Lévesque Beaubien Geoffrion Inc. placed first in the research (tied with Edward Jones), and is consistently tops for the integrity of its research in the Brendan Woods analyst survey. Still, one Montreal broker at Lévesque describes equity analysts’ reports as corporate finance’s ‘flavour of the day.’

Another complaint this year was about the high turnover of analysts – as high as 30% at some firms. Craig Strachan, Toronto-based vice president of research services at TD Evergreen Investment Services Inc., says the following is a common complaint at many firms: a research analyst arrives at the firm and covers a particular stock; the advisor buys the stock for clients; the analyst leaves the firm and, suddenly, there’s no longer research available.

What’s an advisor to do? They can call friends at other firms to vet analysts’ picks. Or they could turn to the ‘Net.

The Silicon Investor Web site (www.techstocks.com) was mentioned more than once by advisors who have clients who like to surf. Its home page mission statement says: ‘Financial information is no longer an exclusive privilege of Wall Street and its contingent of analysts and brokers. [The Silicon Investor] seeks to bring a new financial order to Wall Street.’

For those seeking financial information, the Internet beckons like a siren. But there’s a caveat: ‘It’s hard to say this politely, but there’s not a lot of information on the Web that is really going to make a difference in buying or selling a stock,’ Strachan says. ‘Certainly, in the last three months, the information that’s moving stocks is not really information. It’s talk. It’s chat sites, and I’d be really frightened if somebody was relying on those for long-term, high net-worth investment advice.’

On the other hand, it is important to keep ahead of investors. During the past year of tumultuous Canadian markets, many firms have hired analyst assistants to seek out value-added third-party information. That information might come from foreign news services, independent research houses or the Internet.

Not batting 1.000

Pierre Fournier, Lévesque’s Montreal-based director of research, encourages advisors and investors to check every source of information before making a decision. ‘Analysts don’t have a 1.000 batting average. That’s for sure,’ he says. ‘They do their best, but you can never do too much research.’

At Lévesque, 21 sector analysts cover Web sites as a part of the company’s due diligence on companies. Sometimes Web addresses or additional research comes on the advice of brokers, in what Fournier describes as an ‘interactive’ atmosphere at the brokerage.

‘But by and large, the investment advisor doesn’t have enough time to do a lot of independent research,’ Fournier says. ‘He may do some research in a small number of situations, but you can’t expect an advisor to keep up to date on the TSE 300, and at the same time do the job with the client. That’s what we’re here for.’

Diane Bohaker, Edward Jones’ Toronto-based equity marketing specialist, doesn’t encourage her firm’s advisors to look outside for research. The company has 18 researchers at its head office in St. Louis, Missouri, who watch stocks. ‘We feel strongly you’re not going to find better research elsewhere,’ she says. ‘It goes back to the very core of our philosophy, which is buy and hold.’

Still, with a total of about 30 Canadian companies on their recommended list, advisors at Jones’ want more. ‘The quality is good,’ says one broker, ‘but quantity is light.’ Edward Jones analysts added a dozen Canadian companies to their list this year, and Bohaker says they plan to add more this year within their traditional blue-chip strategy.