How Do Broker Stock Picks Do?

Source: Capital Pixel

In previous posts, I've described the process of picking a purported market beater as similar to trying to pick a blue marble out of a jar where 80 marbles are red and 20 marbles are blue.  After all costs are taken into account, this represents roughly the odds that picking an actively managed fund will outperform its index.  This holds across various asset classes, time periods, and even countries.  It is undoubtedly why investors are flocking to low-cost, well-diversified exchange traded funds and why the exchange traded fund market which has been based on index product has seen explosive growth.

From a different angle, I run into DIY investors who tout the research of their brokers or of someone they follow on CNBC. And, admittedly, judging by the length of research reports, the number of complicated colored charts, and metrics presented, the reports are impressive - both for fundamentalists (those who focus on balance sheets and income statements) as well as technicians (those who focus on visual patterns).
 
But the question doesn't change - do the picks add value?

The results of an ongoing study by Barron's - Zack's spreads light on this question and is described by Vito J. Racanelli in The West Coast Was the Right Coast.

The study examines the stock picks of 9 brokers over various time periods.  The longest period over which all 9 were included was 3 years.

The following table shows their results for the 3 year period:

Broker	3 Years
Wedbush Securities	81.05%
McAdams Wright	63.49
BoA/Merrill Lynch	62.95
Edward Jones	50.97
Goldman Sachs	50.69
Morgan Keegan	48.15
Morgan Stanley Smith Barney	46.31
New Constructs	45.35
Charles Schwab	43.21
Average Broker	54.69
S&P 500 (With Divs)	57.70
S&P 500 (Equal Weight)	70.35

The bottom line conforms with other lines of research.  If you feel lucky, go with the broker picks but recognize there could be a hefty cost if your rabbit's foot doesn't hold out.

There are other interesting results that can be gleaned from the study.  The winner over the 5-year period was McAdams Wright with a return of 14.12%.  Should you have gone with them?  For the most recent six months, they are at 3.95% versus 9.49% on the S&P 500.  Ooch!  As with previous research, consistency is an issue.  Playing the hot hand can be costly.