A cautionary tale for everyday investor folk
In the olden days, before the Internet, newspapers used to make lots of money. This meant that they could afford to employ specialist writers as well as generalists. Amongst these specialist were journalists who understood the nuances of niche financial topics because that’s all they would write about. The result was that readers could trust what they read in the newspaper about new issues, new products, new derivative instruments and so on.
With the advent of the Internet and the ensuing collapse of traditional newspaper publishing models, specialist writers began to find themselves marginalised as newspaper owners cut headcount and found more value-per-dollar in generalist writers who could cover celebrity weddings, man-bites-dog stories and write about ‘personal finance’ i.e. the best credit card, the best home loan etc.
This left a gap within the pages of trusted and respected newspapers for commentary and insight on more complex financial products, services, asset classes and trends since there were no longer enough specialist writers to fill all the gaps.
Into this breach stepped analysts from broking firms. Many of these analysts were employed to write research pieces that would be sent out to the firm’s client base and prospect list to educate and to drum up business. It was little effort for these analysts to re-work their existing material and send it to short-staffed newspaper editors for them to use as filler material for their finance pages.
In some cases this was like manna from heaven for newspaper editors because the copy they were being sent had the unbeatable attraction that it was completely free. The fact that the copy appeared to be both complex and authoritative only added to its attraction.
So what’s the problem?
Problems start to arise when analysts start promoting one asset class at the expense of another. Such behaviour might be understandable if the analyst was writing for the customer base of the firm that employs them, presuming their firm had undertaken full know-your-customer due diligence. But when the analyst is writing for a broad newspaper audience on which know-your-customer due diligence has been undertaken, then the risks become obvious.
But, grandmother, what big eyes you have!
The prospects of this kind of behaviour getting out of hand are multiplied when a new asset class arrives on the block that is not well understood and broadly untested: new Basel III compliant hybrid securities are a case in point.
There are not many instances of issuers of these hybrids being faced with ‘trigger events’ that would cause the hybrids to convert from debt to equity, so much of the discussion surrounding ‘what if’ scenarios is still fairly hypothetical. There is nothing wrong with hypothetical discussion in newspapers as long as it is fair and unbiased. But there would be something seriously wrong if a self-styled guru of fixed income stood on their soapbox and scaremongered about buying hybrids because their salary was being paid by a broking firm that dealt in corporate bonds only.
Similarly there would be something seriously wrong with an analyst at a broker firm that dealt exclusively in hybrids scaremongering about the dangers of buying junk-rated corporate bonds because trading in these bonds was in the range of thin to non-existent.
And they all lived happily ever after
Investors need as much information as they can get in order to make rational and informed investment decisions. It can be difficult for investors to differentiate between fact and opinion if the material that they are being fed comes in the guise of expert advice being peddled by an analyst with a conflict of interest.