A second opinion from your broker on buying a stock is a good idea. But it's tough to get an opinion on the opinion.
Major brokerages, in settling a suit by New York Attorney General Eliot Spitzer, are providing recommendations from so-called independent research firms along with in-house buy-sell-hold advice.
Spitzer had sued the firms for touting the stocks of their investment banking clients, a cynical conflict of interest.
Independent research is defined as research by firms that don't do investment banking. The change already seems to be having some positive effects.
"In the lion's share of the cases, the research differs in the ultimate recommendation" between the in-house and independent reports, said John Meserve, president of BNY Jaywalk, which provides independent research to seven of the 12 brokers in the settlement.
Web site clicks at the firms show that retail brokerage customers are seeking the independent reports, despite the brokers' grudging acceptance of the Spitzer penalty.
"There was not a lot of expectation that people would open the independent research" Web pages, Meserve said. But investors are hitting the independent research pages 10 times more than in-house research, he said.
As you browse new recommendations on your broker's site, keep two things in mind:
Don't assume the independent research is more objective or better than in-house research your broker provides.
Firms that do not engage in investment banking are more likely to issue "buy" ratings than investment banks, according to data from Thomson Financial, a compiler of stock information. That's contrary to what many investors might expect after the recent investment banking scandals.
Kei Kianpoor, chief executive of Investars, a service that provides performance track records of analyst recommendations, says analysts at the major brokerage houses have improved in terms of making correct buy/sell calls in the past 12 months.
There is no arm's length source for measuring the effectiveness of buy-sell-hold recommendations by independent analysts hired by the major firms.
Investars.com offers a free sample of what such a service might look like, covering one- to four-year periods, but its stable of data contributors is limited.
Brokers resist public measurement standards for analysts.
A consultant hired by Piper Jaffray to select independent research providers tells customers, "A 'good' idea for one client may not be good for another client." But a "buy" rating that loses money over four years is hardly a good idea.
Investors are welcoming independent research from their brokers. Brokers are reducing their staffs of in-house analysts to save money. Facing greater demand and smaller supply, independent research should thrive. Published track records would help.
Kenneth Shea, head of global equity research for Standard & Poor's, one of the independent research providers, said investors want to know three things:
How well do the independent analyst stock selections work versus the in-house picks and a market benchmark?
Does the advice make money?
Does the advice require a minimum amount of trading?
Those are good ideas.
Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at email@example.com.