View from City Road: Accounting for conflicts

UBS PHILLIPS & Drew has made itself a laughing stock over the Terry Smith affair. This is the second time in little more than a year that the broker has found itself in a highly visible mess over publications by its well paid analysts.

The problem arose after complaints about advance publicity for Mr Smith's book, Accounting For Growth, from Grand Metropolitan, a client of Union Bank of Switzerland, P&D's parent. UBS demanded that the book, based on a P&D research note, be withdrawn. Mr Smith declined, and was suspended.

Either Mr Smith's work has hit the mark, in which case P&D is bowing to pressure from UBS's corporate clients, or it is off beam, in which case it reflects badly on P&D's research note.

UBS is damned either way, but the incident belies a deeper malaise. Over the past five years it has become apparent that institutional investors are not prepared to pay enough in dealing commissions to give a decent return to stockbrokers for their armies of analysts, salesmen and traders.

The only way to make a profit from research is through market-making and corporate finance. Both present potential conflicts of interest.

If investors want truly independent stockbroking research, they have to pay for it. But there is no evidence that they are prepared to pay. And from the continuing success of integrated houses such as Warburg Securities, which makes no bones about the importance of corporate clients, it seems institutions don't care enough about independence anyway.