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Tuesday, July 29, 2014

Are You Beating the Brokers?

 Do you like stock tips?  Do you use broker stock picks?

Barron's has tracked  the performance of the focus list of 7 brokers over the first 6 months of 2014 ( RBC Is in the Lead Going Into the Turn, Vito J. Racanelli).

Here's the Table showing performance for 6 months ended 6/30/14:

RBC Capital Markets
Morgan Stanley Wealth Mgm’t.
Credit Suisse
Bank of America Merrill Lynch
Goldman Sachs
Stifel  Financial Management
Wedbush Securities
Average Broker
S&P 500 Index Total Return
S&P 500 Index Equal Weighted

Source:  Zachs Investment Research

Note that, although the average return is below the S&P 500, it is because Wedbush Securities bombed with a return of -8.68%.  In fact, 5 of the 7 outperformed the Index.

What are we to make of these results?  First, for those with the time, the resources, and the know how, buying individual stocks is obviously the least-cost solution to managing assets.  Buy stocks versus funds, and there is no annual management fee.  In many instances, this can be a huge savings.  Versus low-cost index ETFs, the savings is there; but it is small.  Secondly, the market-beating potential for individuals managing stocks picked from focus lists, if it is there, probably requires at least a bit of  a buy-and-hold approach.  Thirdly, readers should know that there is voluminous evidence showing that, over the long run, broker picks do not add value and persistence of performance is absent.

The bottom line is that, if you follow the performance of the broker's stock picks over the next ten 6-month periods, historical evidence suggests that you should find no consistent leaders among the brokers.

A big question is exactly how would you incorporate the picks in a viable portfolio strategy?  Do you focus on the winning brokers and equally weight their picks?  Do you maybe use the picks of the top 3 brokers?  Or, should you take a contrarian approach and go with Wedbush?  Or should you go to RBC or Morgan Stanley to get an advisor and have him or her manage a portfolio based on the picks?

To me, it is interesting when you get down to the implementation level.  From my side of the desk, I know there are people who will read this type of article and go out and open an account with RBC or Morgan Stanley.  A light bulb will go off in their brainm and they'll think "my investment approach heretofore hasn't been successful because I've been following the wrong stock pickers."

One consideration is that using an advisor at the brokerage will result in fees that could wipe out the performance advantage of the stock picks.

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