Brokers' scarlet 'A' might aid investors

The Insider

Your Money

February 15, 2004|By BILL BARNHART

TEN MAJOR Wall Street brokerage firms soon will step from the shadow of litigation into the "vivid light of day," to quote Nathaniel Hawthorne, wearing a scarlet "A" on their institutional chests.

"A" as in analyst.

The 10 brokerage giants, including Merrill Lynch & Co. Inc., Morgan Stanley and Salomon Smith Barney, stand accused of adulterous relationships with their investment banking clients.

Ordinary investors were told through expensive marketing campaigns that they held the exclusive devotion of the brokers' stock analysts. They were deceived. Many analysts were just promoting shares of corporate underwriting clients.

As penance, the brokers have agreed for the next five years to give their investor-clients a free second opinion on the stocks their in-house analysts cover.

Under the settlement, approved by a federal judge last fall, the second opinion must come from independent analysts chosen by independent consultants at each firm.

The independent rating, the scarlet letter, "must be included prominently" with the in-house research advice, the settlement states.

In the world of buy-sell-hold ratings for active investors, this could be a novel benefit.

But the 10 firms are taking a hands-off approach to the settlement, for two reasons:

They hate the stigma attached to the second opinions, which will be glaring reminders of their past infidelity to investors.

The firms also say - off the record - that they can't promote the details of the settlement without appearing to interfere with the independence of the process.

(Under the settlement terms, the brokers have no responsibility, or liability, for the work of the independent consultants or the research providers hired by the consultants.)

"They're going by the letter of the law. They're not making a business out if this," said Thomas White, president of Best Independent Research, a consortium of researchers bidding for the second-opinion work.

As a result, you're on your own if your broker's analysts say "buy" and the independent analysts say "sell."

Before long, digit-heads with Web sites will reveal how the performance of the buy-sell-hold advice of brokerage analysts compares with the performance of the independent analysts.

These inevitable comparisons put public pressure on the independent consultants to hire effective stock-pickers.

Michael Dritz of Armonk, N.Y., a retired specialist in international investing, is the independent consultant for broker UBS, one of the defendants in the analyst abuse case.

He's hearing from research providers "literally from all over the world," he said. "I have to vet them. I have a set of criteria they will have to sign off on."

The 10 independent consultants have enormous power, under the spotlight of state and federal regulators, to showcase verifiable stock research talent, including researchers who disdain working for big-league brokerage firms.

At the end of five years, investors might be willing to pay for this advice.

Bill Barnhart is a financial columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at yourmoney@tribune.com.

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