We Do Not Believe Analyst

Analyst is one of the best-known and most highly respected brokerages in Israel. Over the years the company has maintained a strong brand, that investors associate with professional investment management, devoid of bias, and honest.

Honest? Even the great Analyst, we discovered on Tuesday, does not hesitate to risk the reputation it built up over 20 years, for a chance to increase its revenues by 11%.

Analyst, we discover, has joined the dubious list of investment firms that put the cart before the horse. It uses money that it manages for clients to buy shares at public offerings. Not just any IPOs, but ones that Analyst underwrites, meaning, offerings at which Analyst gets directly paid, and usually well at that.

How well? As well as 11% of Analyst's revenues in the third quarter of 2006, or about NIS 4 million.

It turns out that Analyst customers bought 24% of the offering by Kamor, in which Analyst was one of the underwriters.

If it is any comfort, Analyst was not the only one. 75% of the Kamor offering was bought using public money managed by bodies directly associated with the underwriters: Apex, Clal, Migdal. And if this is any comfort, Kamor is not the first occasion on which Analyst has behaved this way. In the last two months, Analyst's clients found themselves the proud owners of 8% to 25% of each of eight offerings that Analyst helped underwrite.

Now, we all remember the Analyst management when it spearheaded the Battle of the Brokers against the banks in the throes of the Bachar reform. We remember them explaining time and again why banks shouldn't be given distribution fees: because they could tilt the advice on investments that the banks give to clients. They could tempt investment advisers at the banks to recommend that their clients invest in vehicles that make more money for them.

In their zeal, the Analyst management reaped again and again that objective advice could not exist in a place where the bank has a vested interest.

The paramount interest

Analyst is not a bank. It does not, ostensibly, provide advice. But it does manage client money and is committed to doing so in the manner that best benefits its clients. The interest of its clients must be paramount, overriding other interests, including that of itself.

How does the client interest compare with that of NIS 4 million income that Analyst received by helping companies sell their shares to the public? Where is the public interest when the Analyst investment managers have to choose whether to invest the public's money that they manage, in offerings, that by chance - Analyst also profited from?

We remember how Analyst management mocked the claims of the bankers, who argued that the banks were not suffering from conflicted interests, and that Chinese walls made sure the bank customers received fair advice.

The Analyst managers did not believe that the banks could withstand the temptation of harnessing the clients to improve the bank's profit.

By the same token, there is no reason for us to believe the Analyst managers, that the Chinese walls work properly at their little investment firm, and that client money is not used to boost Analyst's profit as an underwriter.

We do not believe Analyst. And if the great Analyst has stumbled, then we certainly don't believe the other players in the capital market. We do not believe any of the brokers simultaneously involved in managing client money and in underwriting.

We do not believe the insurance companies, that do everything the brokers do, just multiplied by billions and add more conflicts of interest onto that by extending credit to companies and trading in bonds as market makers.

No, we don't believe that anybody in Israel's financial market has the courage to stand up and shout: No more. The brokers had no trouble throwing stones at the banks when they were managing public money despite conflicts of interest. It is time for them to toss a stone at themselves.

Anybody purporting to manage public money in trust, must not engage in other financial market activities that create a conflict of interest, and that list is led first and foremost by corporate issues.

Insofar as is known, there is only one body in the capital market that announced it would avoid conflicts of interest like this: Prisma. Until further notice, Prisma is the only company we believe in the entire financial marketplace.