Conflict of Interest

In the late ‘60s, my brokerage recommended National Cash Register. I bought 10 shares at $169 a share. Immediately the stock started going down. After months of inquiries about the downturn, I kept receiving repeated assurances that it was temporary. I finally sold at $65 a share. In 1973, BusinessWeek magazine described what had happened. NCR had expected to get the Sears account for its new computerized cash registers. Instead, Singer Sewing Machine got the account. I believe my brokerage had known this, but the firm itself had a position in NCR stock. They apparently let the small investors hold while they themselves got out!

--F.F.D., via e-mail

The Fool Responds: You’re right to question what was going on. People don’t always realize that many investment banks and brokerages face conflicts of interest in recommending stocks because the firms may also own the shares of companies they recommend, or may do investment banking work for the companies.

One of the most common criticisms of brokerages is that they’re too soft on companies they follow, because they don’t want to lose banking business. That’s why you rarely see a “sell” recommendation--even though analysts may privately tell their best clients how they really feel about a stock.