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TEXT OF STORY
Tess Vigeland: Just for fun, go to Google and type in the letters MSFT. What you’ll get back is pages and pages . . . and pages . . . of information about Microsoft stock. Financial reports, news about the company, opinions about whether you should buy, sell or hold. And although Microsoft might be the extreme, it’s an apt example of how bewildering it can be to get reliable, solid information.
Many investors rely on research from the major brokerages — Merrill Lynch, Morgan Stanley, et cetera. But a lot of those banks are actually making their research less available to the public. Marketplace’s Amy Scott reports.
Amy Scott: On a December evening about five years ago, Eliot Spitzer appeared on the Charlie Rose show on PBS. He was New York’s Attorney General at the time, and he was investigating conflicts of interest between research analysts and investment bankers at the big Wall Street brokerage firms.
Eliot Spitzer: The analysts tended to be overly optimistic and push the stocks that the investment bankers were underwriting, whether or not their honest belief was that the stock was a good investment.
A few days later, Spitzer announced a historic settlement. The major brokerage houses would pay $1.4 billion in fines. And they agreed to sever the ties between their investment banking and research divisions.
Pat Bajari teaches economics at the University of Minnesota. He says the changes were meant to protect individual investors by providing them with unbiased advice.
Pat Bajari: But we might have done some things that hurt individual investors at the same time.
For one thing, Bajari says the settlement has discouraged investment banks from devoting as many resources to stock research. They can no longer pay for it with investment banking revenue, so many have slashed their research budgets and cut staff. Bajari says the number of analysts covering companies on the Nasdaq 100 index has dropped by a third.
Bajari: Analysts come out with their different earnings forecasts, recommendations about stocks. And when that was out in the public sphere, that was sort of how we had an argument about these companies and their prospects. And to the extent that we shut down that discourse, it’s not clear to me that that’s good for the markets or good for the economy more broadly.
Another factor has contributed to the research decline. About seven years ago, a rule took effect that requires corporations to disclose financial information to all investors at the same time. That’s made it harder for analysts to generate unique investment ideas.
So banks are guarding their research more closely. Merrill Lynch recently announced it would no longer make its research available to non-clients. It also restricted media access to its reports.
Michael Ross follows the industry for research firm TABB Group. He says the best investment tips go to those who can pay the most. And these days, hedge funds tend to top the list.
Michael Ross: What it comes down to is, when a trade idea comes across to the trading desk, who’s gonna get that first call? And I think, are some of the names that you’d expect to be at the top of the list, and who probably were at the top of the list five years ago, are they a little further down the list? In some cases, that’s probably true.
Institutions that represent smaller investors, like pension and mutual funds, are finding themselves lower on the totem pole.
Horacio Valeiras manages about $15 billion in assets on behalf of pensions and endowments at Nicholas-Applegate Capital Management. He says his clients want to pay less for his services, so he can no longer afford the big banks’ prices for top-shelf research.
Horacio Valeiras: One major firm actually told me that we needed to increase the commissions we paid them from, you know, about 3 cents a share to 8 cents a share for it to make sense, and you know, we can’t do that.
Valeiras says regional brokerages and independent research firms have stepped in to fill the void. And the resourceful small investor, like retired courier Martha Perkins, can still find plenty of good tips out there.
Martha Perkins: I haven’t gotten fearfully rich, and I haven’t gone broke, so I guess that’s about the best one can ask.
Perkins gets her information from newsletters, like the Hulbert Financial Digest. But it, too, has a price: 59 bucks a year. And Perkins says she spends a few full days a month reading up on investments.
In New York, I’m Amy Scott for Marketplace Money.
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