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The Daily Interview: Taking Brokerage Analysts to Task

The impartiality of Wall Street analysts has been criticized by some, but now the author of a new book about analysts blasts them unequivocally.

Benjamin Mark Cole
The Pied Pipers
of Wall Street:
How Analysts Sell
You Down the River

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Benjamin Mark Cole, author of The Pied Pipers of Wall Street: How Analysts Sell You Down the River and a columnist for the Los Angeles Business Journal, maintains there are no unbiased analysts on Wall Street because, even if an analyst's firm has not done any underwriting for a company, there is always the possibility it might.

Cole believes investors should instead rely on stock analysis from neutral sources, such as Standard & Poor's and Value Line, and also do some sleuthing of their own.

TSC: In your book, you say that brokerage analysts are expected to partner with their investment banking departments. Why is that happening today and why didn't it happen in the past?

Cole: The signal change came in 1975 when trading commissions were deregulated. Prior to this time, it cost an awful lot of money to buy stocks. If you bought $10,000 worth of stocks, you paid several hundred dollars in commissions to your stockbroker. Wall Street profited on these regulated trading commissions. As antique an idea as it sounds, this is how Wall Street made its profits. And in those days, since investment banks couldn't attract retail or institutional business through lower rates, analysts were expected to pick good stocks for them to give investors a reason to trade through them.

In 1975, Wall Street realized that due to technological changes, they couldn't keep this Shangri-la and rates were deregulated. When the discount brokers like Charles Schwab started to emerge, rates started to go down. Suddenly, with trading really becoming a commodity, Wall Street didn't know how to make money.

Investment bankers have now become the new profit center. They're the guys who do the initial public offerings of stock, secondary public offerings and bond offerings. So, the analysts, who before had tried to help the individual retail investor, are now aiding the investment-banking department because that's where they make their money.

If an investment bank does an initial public offering of a dubious stock, what is the analyst going to do? Is he going to say this stock's no good and destroy the profit-making ability of his own brokerage?

The analysts have become part of the marketing and investment-banking departments because the investment-banking department is the big profit center for all of these brokerages.

TSC: But not all analysts work for firms that have done underwriting business for the stocks they cover. How can an individual investor determine whether an analyst's firm has done any investment banking or underwriting for a company and may, therefore, be impartial? And are there any analysts you admire?

Cole: I would say there are no impartial analysts, and no, there are no analysts who work for brokerages that I admire. Their job has become that of lawyers. They are not the judge in the courtroom, they are the lawyers in the courtroom. And the lawyers' job is to put forward the best case on behalf of their client. Whenever you hear an analyst speak, consider him a lawyer on behalf of his client. They may be telling the truth, but it may not be the whole truth.

Even if a brokerage has not done any underwriting business for a company, they almost certainly have large institutional clients who have invested billions of dollars in a stock they cover, and having an analyst put out a negative report on that stock is a concern. Commercial banks now own brokerages, so commercial banking relationships could also be threatened if an analyst puts out a sell signal. And investment banks are always hoping for investment-banking underwriting or bond-underwriting business. There are even more conflicts that go on.

TSC: Are there any other resources investors can turn to, then, to find accurate and helpful investment information?

Cole: Yes, there are a number of places investors can go for research that is not compromised, in my opinion, and I outline a number of these in the chapter, "The Good Guys." Standard & Poor's [now a part of <b></b>] has an excellent crew of analysts who do not do any underwriting business, so their analysts are largely impartial about how companies should be rated. I also like And good old Value Line is not half bad. They have a good track record. Hulbert's Financial Digest is a newsletter that rates other financial newsletters. It also goes without saying that you should get a subscription to The Wall Street Journal. is another good source. More important than your individual stock analysis is the attitude of skepticism that you can pick up from the site. In the book, I even mention [<i>'s</i> columnist] Herb Greenberg for being one of the few people who tore into new Internet issuers as being pump and dumpers. As hard as it is to believe today, that kind of writing was hard to find in the midst of the Internet bubble.

I would also recommend that investors do their own research. All the company filings are available at

TSC: Why is it that analysts so rarely make sell recommendations?

Cole: Their role is to sell stock and to help their large institutional clients. Less than 1% of their recommendations are sell recommendations. It's proof to me that their role on the Street is to help the investment-banking department. In fact, an abundance of industry and academic data show that if you follow analysts' recommendations, you will underperform the market. has a revenue-sharing relationship with under which it receives a portion of the revenue from Amazon purchases by customers directed there from

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