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Dog-eat-dinner: a tough day in the life of a broker analyst

As we end the February results season spare a thought for those poor but highly paid broker analysts.

The job of a broker analyst is to scrutinise stocks, and during results season, when a company's announcement drops, the sooner they do it, the better. Here's why February is purgatory for them, and why you should know what they are doing.

First in, best dressed with broker commissions

In order to be competitive, at the very least, on the announcement of an important company result, the big broker analyst must immediately read the announcement and hit the biggest institutional clients straight away. A crisp and accurate analysis is essential, including an action recommendation that hopefully generates an order that makes both the broker and the client look very clever, very quickly.

Analyst bonuses are based on a few KPIs. The first is corporate fees from the companies they cover. The next is market share compared with all the other brokers of trades in the stocks they cover - when a company choses a broker to do a corporate deal, the first thing they check is the market share in their own stock to identify the broker most engaged in their stock. Generating orders is the daily bread and butter but getting a corporate deal is the cherry on top.

A quick update to the dealing desk, then the world

On top of that, the big broker analyst must verbally brief the whole of their dealing desk with a similarly accurate, informed and hero-making opinion. Their dealers can then disperse the view rapidly down the phone lines in the pursuit of even more first-mover inspired salary-justifying orders.

And all before the competition does the same thing.

Next, the analyst tunes into the conference call with the company, furthering their own personal brand and that of the broker through the teleconference protocol which includes stating your name and institution and asking brilliantly insightful questions you already know the answers to. Your future employers, who are almost certainly listening, might also be impressed. Then, in less than half an hour, the analyst issues a written summary of the results that further carries their brand and brilliance to the inboxes of the entire industry.

At the same time, if they want to remain employed, their opinion mustn’t jeopardise any relationships their broking house might already have with that company and, if they know which side their bread is buttered, actually furthers the relationship with the company ... just in case they have a corporate deal paying healthy fees sometime in the future.

And finally, amid the constant barrage of client and dealer questions and even a visit or two to the biggest clients' offices, these analysts write a fresh and original 20-page piece of research for the next day’s morning note that 'stands out' from the other broker research. It must be proofed and submitted by the research editor’s deadline somewhere between closing time on the day of the announcement and 4am the next morning.

Dinner's in the dog

That’s if the analyst only has one result a day. Some analysts are responsible for two or three company announcements a day. On the biggest day of the results season, there are 20 Top 200 company results all of which must be digested, analysed and regurgitated before the research is sent out at 6am.

Good luck getting home that day, week, month. “Dinner’s in the dog” is a great 'Welcome Home' post-it note when you’re busting your arse bringing home the bacon. Tough stuff.

But before you pull out your violins, imagine doing all that and getting it wrong. Imagine what it’s like for an analyst running with a buy recommendation when the results are terrible, or a sell recommendation when the results are great. There’s standing out and there’s standing out for the wrong reasons. Get it wrong and you’ll be pushing research out at 4am in a cloud of shame. Your dealer group will abuse you for their lost goodwill, the corporate department will send you to Coventry (or worse) forever. The clients will drop you for your lack of value and your competitors, and potential employers, will rejoice in your misfortune and tear up the CV your headhunter just sent them.

Is it any wonder forecasts hug the consensus? In a broker-eat-broker world just remaining a broker is sometimes reward enough. Survival is a bonus. Success is rare.

So spare a thought for the brokers as you read the research this February. You have the luxury, in the clarity of the morning, on a full stomach, after a good night’s rest, with the power of hindsight, in the context of multiple opinions, of casting judgment on a professional, under a lot of pressure, with an empty stomach operating at 4am in the morning whilst their dog sleeps at home, bloated by a well-done rump steak.

They’re a tough breed those broker analysts, in a dog-eat-dinner world.

 

Marcus Padley is the author of the daily stock market newsletter Marcus Today and the Co-Manager of the Marcus Today Separately Managed Accounts. To invest with Marcus or sign up for his newsletter, see marcustoday.com.au.

 

12 Comments
Gary M
February 28, 2021

Another side of broker reports not mentioned here is the price forecasts. The process is ridiculous, as illustrated by Afterpay. When the shares were $20, the broker targets (are they forecasts?) were $28. When the shares went to $50, the targets moved to $70. Most recently, when APT hit $150, one broker increased the target to $170. It's now $115. I wonder if these brokers have a quant process than says 'Current market price X 20% for momentum stock".

Jim
February 27, 2021

So hang on .... why are brokers any different from “independent” newsletters selling subscriptions to “thousands of investors” for anything up to and north of $1,000pa for much the same analysis, recommendations and accuracy?

Graham Hand
February 27, 2021

Jim, there's a world of difference based on Marcus's examples. A genuinely independent company research service (such as Morningstar's, owner of Firstlinks) does not give its analysts any incentives whatsoever to offer favourable reports. I can assure you from my experience that there is no pressure on analysts from within the business. But Marcus is saying from his experience that because a company gives brokerage, placement and investment banking fees to the broker, then the analyst's "opinion mustn’t jeopardise any relationships their broking house might already have with that company".

Jim
February 27, 2021

Point taken, thanks Graham, and reinforces the need to source advice widely.
Btw, I think Firstlinks excels in the information space. Always plenty of value. Regards J

AlanB
February 26, 2021

Are there still human broker analysts actually reading multiple company announcements? I thought the whole reporting process was now fully automated with algorithms set up to detect pre-determined key words and phrases resulting in buy/sell orders.

Denial
February 26, 2021

Brokers are just like politicians in not working in an actual commercial business. Even small retail investors with +12 months experience soon realise the worth on a broker report, as they know its just there to create confirmation bias.

PeteR
February 25, 2021

So, the movie Wall Street & the Wolf of Wall street were Documentaries ?

Peter Vickers
February 25, 2021

Great story but so last century
Clearly these share brokers did not read the Hayne Royal Commission report
Most of the story would have sent the broker to gaol.
There is conflicted remuneration, breach of duty, conflicted advice

George
February 25, 2021

Peter, I seem to recall the banks, fund managers, advisers and mortgage brokers being hauled over the coals by Mr Hayne, but I don't recall anything on the stockbroking community. They are either saints or their connections are too good. How do you explain so few sell recommendations? And we are abandoning Hayne anyway - mortgage broker commissions, responsible lending laws, now even company disclosures.

JanH
February 25, 2021

Here, here, Patrick. I take broker's recommendations with a grain of salt. But, thanks, Marcus, for the insight into a broker's life. But, if the broker's life is such misery, why does anyone sign up for the job? Surely, it couldn't be for the money and those nice bonuses. Or is it the adrenoline rush they hunger for? Frankly, I don't feel sorry for them. Consider instead the hapless retail investor trying to decipher the truth underlying the company reports and the analysts' assessments. Are they trying to pump up or deflate the stock price? As Marcus confirms: so much self-interest informs the research.

Clive Wilson
February 25, 2021

Thanks Marcus,

The last time I saw someone open a violin case it had a gun in it so I can appreciate your fear.

Being older than your Managing Editor I have observed many changes in broker world. I remember the days when investors were mainly concerned with regular statutory financial results and periodic M&A actions. As it was rotary dial landlines and snail mail could hardly keep up with this pace in any case. We are all victims of our success and over the years increased disclosure requirements together with even faster technology enhancements means that communication is no longer an issue (not sure whether it’s the chicken or the egg’s problem). Companies communicate more meaning that brokers have to write more and investors have to read more and then presumably react more.

Anyway not too bad eh, taking a click on buy and sell trades eases the pain.

As an aside, years ago I remember asking my MD about some internal guidance around forecasts .... they referred me to broker reports ... so well done on a great job.

Love your work ….. and remember at least a violin case is not a horse’s head …

Patrick Bennett
February 25, 2021

All of which is why this sort of broker research is best read for its amusement value only.

 

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