Bias and Conflicts of Interest on Wall Street

By: ispeculatornew
Date posted: 01.05.2007 (12:00 am) | Write a Comment  (0 Comments)

      Post a Comment

Today I am going to write about a topic that hopefully most investors are already aware of, bias and conflicts of interest on Wall Street. The big brokerages, investment websites, and other financial institutions have a major bias towards buying stocks. They also put many other interests ahead of the welfare of the individual investor, namely their own profits. Consequently, investors are better served to do their own investment research and make their own investment decisions.

First, let’s talk about the Wall Street bias towards buying stocks. If investors have the means to they can keep buying stocks indefinitely, and therefore generate commissions for brokerages. However, investors can’t keep selling stocks indefinitely. At some point an investor isn’t going to have any more stocks to sell. Also, if investors think the markets are going to go up they are going to be more eager to pay for financial advice. If they think the markets are going to go down they will be more inclined to keep their money on the sidelines and not invest at all. Therefore, financial institutions will promote buying stocks even if it’s not in the best interest of investors.

One place this shows up is in analyst’s recommendations. One study that I read about on the internet said that in 2005 only 7% of analyst’s recommendations were sell recommendations and 46% were buy recommendations. That speaks for itself.

A second place this shows up is in the financial news. There is a tendency to play up the good news and downplay the bad news. I have read plenty of stories that said sales or earnings “surged” when there was actually only a modest increase. Also, take a look at the predictions for the upcoming year. Almost all of them are pumping another good year for the markets even though the markets have had quite a run and the economy looks lethargic.

In addition to this bias, major brokerages also have a major conflict of interest when their analysts give recommendations. They covet investment banking relationships with the companies they are covering. Therefore, they are reluctant to give sell recommendations that could damage this potentially lucrative business. A company will be less inclined to choose a brokerage for investment banking services if that brokerage’s analysts are slapping it with a sell recommendation. Even if a brokerage says the investment banking portion of its company is independent from its analyst portion, this still has to factor into their decisions.

In my opinion the best option for individual investors is to do their own research and make their own decisions. That way you’ll know whose interest is at hand.

If you liked this post, you can consider subscribing to our free newsletters here

No Comments

No comments yet.

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.