When an analyst upgrades or downgrades a stock, does his big money clients get advance notice? (March 16, 2002)

  This is one of the overlooked conflicts of interest. Surprising in this time of supposedly heightened scrutiny of all transactions. What has developed in recent years is the rise of the big name stock analyst in a particular sector. Each big brokerage house wants a few of them to get the name out there when these big market, stock or sector calls are made. They have made a lot of fuss lately about how tough their analysts have become, some even giving bonuses for downgrades that turn out to be 'the best.' They have been chased around with big salaries much like baseball free agents.

The way things have been set up is that these big name analysts often are given free rein to make whatever calls they want without having to necessarily conform to what the brokers are selling to or telling their clients. The idea is to give them intellectual freedom to make calls as they see them and then avoid the very question you raise: controversial calls being made but the big money clients getting word of it first.

So in theory, they do not get the inside scoop ahead of time and neither does the average investor. Some of my brokers handle accounts that contain millions of dollars. When Jonathon Joseph of SSB made the controversial chip call back in September 2000, the brokers did not get a heads up on this. One broker complained to us that he had just put some big clients into some semiconductor stocks just in time for the call to come out and for them to get whacked. Many brokers complain of not getting the information ahead of time and being able to properly position their clients. Again, these include accounts with millions of dollars in assets in them. Not only do they not get an alert before the big calls are made, but all calls from these 'semi independent' analysts. Seems they carry the brokerage's name but don't have to reveal to the brokers or their clients the calls they are going to make.

To us that sets up a conflict of interest in the other direction. It is not the well to do clients getting the scoop before the street (although that may indeed happen for those in the very inner circle), it is the client getting the shaft. Many of these clients rely on their broker's advice as to where to put their assets to work, particularly in managed accounts. If the brokerage house is taking in fees for this service and then a call from one of their big name analysts runs contrary to that advice and loses the client's money, that appears to breach a duty owed to the client. You pay money for advice and expertise, and then one of the firm's analysts makes a call contrary to that advice given and paid for and you lose money. Seems you bought the shaft with your fees.

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