Resource World Magazine

s p e c u l at i o n s L eon ard M e lma n Full service vs discount brokerages O ften, mining share investors do not sufficiently consider the sources of their investment information or the method they use to place their orders once an investment decision has been made. However, for Canadian mining share investors, a major news announcement, on September 24, brought these considerations front and center. On that day, Canaccord Financial Inc. jolted the investment community by announcing the company was closing 16 "underperforming" branches, many of them located in smaller financial centres, and, "refocusing its operations in major centres across Canada." The 16 offices represent 50% of Canaccord's total locations; it must be pointed out that the branches which are being closed represent only 16% of assets under management. Canaccord has been an important brokerage house, in terms of handling mining company share offerings, particularly junior exploration companies, as well as general share trading. The announcement leads to important questions for mining stock investors as these closings reflect a decrease in the use of full service brokerage companies. Should I invest using a full-service brokerage company which offers a relatively complete investment research service? Or, should I use a discount brokerage, where I, the investor, must perform my own research or purchase my information? If I choose to do my own research, exactly what type of information service should I utilize? Fortunately, I have some personal experience relating to this question, having been a licensed securities and commodity broker for 18 years – from 1978 through 1996. During my years in the brokerage business, the same kinds of questions came to the forefront, particularly because that was the era when discount brokerage services became widely used. Many quality brokerage houses have fully-staffed research departments which send analysts out on 28 www.resourceworld.com mineral property visits, they thoroughly study financial statements and are in close contact with corporate management in order to perform proper due diligence before making investment recommendations. For the novice investor, these services can be invaluable indeed, particularly since a seasoned brokerage house analyst would appear to be unlikely to be taken in by reports containing questionable information or suggesting unrealistic prospects. However, it must be noted that trading with a major brokerage house can be more expensive as compared to online discount brokerage services as they have a much wider array of costs that must be covered by trading commission revenues. Many investors turn to dealers who offer deeply discounted rates, but little else in the way of services. This means that the investor must obtain quality information from sources he or she must find on his or her own. This information might come from quality mining publications such as Resource World magazine; from newsletters published by an array of mining analysts, by attending mining investment conferences where many companies have exhibition booths, or from information provided by exploration and mining companies themselves. Normally, if an investor seeks to rely on their own judgement to avoid higher brokerage fees, he or she should use a combination of the three. However, what must be realized, at all times, by the wary investor, is that the element of self-interest can be encountered from any of these sources – and the goal should always be to obtain the highest quality of objective information available. Self-interest can colour the content of any supposedly objective report. During prosperous times, an economist for a bank which makes its profits by lending to businesses contemplating expansion, would be particularly loath to issue a report suggest- ing the economy was about to descend into a deep abyss. In the mining industry, some analysts write, "independent reports" on companies which pay them a fee. Their analysis could be biased. Usually, professional analysts disclose any interests they may have in a particular company: stocks held and fees paid. In a like vein, information provided by companies, even though that flow of information is highly regulated by provincial and federal authorities, could be putting their company in the best possible light to encourage investments in the company which might drive the price share higher and also to encourage outside capital to invest directly into the company's treasury and thereby enable the financing of exploration and development. Deciding whether to invest with major brokerage houses for assuredness of information versus being on one's own resources by investing with discounters for lower costs requires a lot of thought and due diligence. After all, if your objective is to realize thousands of dollars in capital gains, a hundred dollar commission to a full service brokerage firm is miniscule in the overall scheme of things if you were advised to invest in the right company. Investors must ask themselves if they have the time and are capable or identifying suitable share purchases on their own or the inexpensive trading fee will just lead to significant losses on the stock market. n This material is taken from sources believed to be reliable and is provided for information only. Any investment decision should be made only after prior consultation with investment professionals. Leonard Melman is a financial and political writer who focuses on issues relating to the resource sector. Mr. Melman lives in Nanoose Bay, British Columbia, Canada and can be reached at lmelman@shaw.ca NOVEMBER 2012

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