Your money, and your obligation

NEW YORK (AP) -- Seldom in financial history has the public been so trained to forsake its own research efforts, judgments and instincts, and instead rely on the opinions of those who claim expertise.

Experts tell you where the economy is headed, which stocks to buy and which mutual funds to join. They claim to uncover inside information and let you in on deep corporate "secrets" hidden from ordinary folks.

They write books, appear on talk shows, conduct seminars and may even phone you at the dinner hour. They seem to be everywhere, experts in the ways of marketing -- but less expert in fulfilling their promises.

"Few, if any, investors or economists forecast the great speedup in economic growth during late 1999 and early 2000," says H. Bradlee Perry of David L. Babson & Co., investment managers.

The experts failed to spot the abrupt business slowdown that occurred last year, he says. It was a surprise, but good research should have seen it coming. Same with the big bull market. And the recession in May 1990 that preceded the expansion? It wasn't discovered until well into summer.

This isn't meant so much to denigrate the efforts of those referred to as experts, some of whom supply informed guidance and advice, but to express wonderment at how readily investors defer to others.

Such deference can lead to trouble. It inevitably leads to trouble, as in the late and unlamented market burst of the past year.

Brokerage house research, for example, is not always designed to provide accurate information on which companies to invest in, which to avoid. Just as likely, it is designed to promote a company's stock.

Critics, including Arthur Levitt, former Securities and Exchange Commission chairman, warn of the inherent conflicts of interest within brokerage houses that cause research to be subservient to revenues.

Investment banking, the financing of corporations, is a big revenue producer for securities firms, causing the stock analyst, as Levitt put it, to walk a tightrope rather than disrupt a banking relationship.

The stock analyst, he says, must balance an obligation to assess a company's performance and prospects while at the same time avoiding comments that might upset his or her employer's investment banking client.

What happens too often, judging from research by Thomson Financial/First Call, is that the analyst's recommendation is to rate the stock a "buy." Of 28,000 recommendations examined, only 1 percent advised selling.

This, says Scott Cleland of the Precursor Group, an independent research organization, strongly suggests that "it is not in the interest of most investment research to warn investors in advance of problems."

Precursor published a "white paper" this month stating that the firms producing most investment research "are rife with potential financial conflicts of interest," one of which is to keep the client company happy. A happy client, Precursor suggests, is one whose story is accepted by the analyst. And companies, it says, are "highly sophisticated in managing their story through public relations and lobbying firms."

Not all stock recommendations come through brokerage firms; there is no shortage of independent advisers, notably Standard & Poor's and Value Line, but often at a price small investors aren't willing to pay.

But that problem too can resolved. How? Simply by using the facilities of a good public library, many of which in response to rising demand began subscribing to independent advisory services during the 1990s.

There in the quiet of the reading room you can assess the value of the research of others, judge it, possibly combine it with your own homework, and arrive at your own decision.