When my father-in-law died, my wife and I took over the responsibility of looking after her mother, who I affectionately called “grandma.” We quickly connected with a very nice lady who was a broker at one of the top brokerage firms in the country.

Over time she became a mentor, advisor, and friend. Although she's been retired for quite some time, we're still in contact and are very close. If I were to pick one attribute that sets her apart, it would be honesty. Ask her a tough question and she'll give you a straight answer, even though it may personally cost her some money.

Around the time that many of the online discount brokerage firms were emerging, our nice lady broker put in a trade where we sold 1,000 shares of a stock at $24/share, so the trade was $24,000.00. When we got the transaction sheet in the mail, there were some small fees, but her firm took a $240 commission just for handling the transaction. I called and asked her how the firm justified those fees to its clients. We were being bombarded with television commercials, letters, and flyers from discount brokers who would handle the transaction for only $19.95. Basically, I asked her what the extra $220 in commissions bought us.

She was very straightforward, and it was apparent I was not the first client to ask. She said that she cut the commission to rock bottom, meaning there was no lower fee structure available, and then went on to explain that discount brokers were merely transactional brokers with no research departments and no advice. They just processed transactions. By contrast, her firm had all these high-priced folks in New York who did tons of research and analysis and provided advice and guidance.

I then (with her help) wrote a letter stating that I was toying with making an investment in a particular market but wasn't quite sure if the sector made sense – and if it did, what particular stock would be the best choice? She took my letter, put her cover letter on top of it, and sent it to her firm's gurus in New York.

A short time later, we got back a 2-3 page report discussing the sector and recommending a particular company to invest in. They recommended it as a “strong buy.” It was also clear that the primary reason they felt that way was a chart showing that 8 of 10 major firms recommended the company as a “buy or strong buy.” Other than the standard information about growth, P/E ratios etc., there was really not a whole lot of support behind why the particular stock was supposedly so appealing.

Honestly, I went nuts when I read the report, because simply saying that 8 of 10 major firms recommended something was not research. Actually, it was an admission of delegating the research to some other firm and then hoping it did it right. Perhaps that was why the P/E ratio was so ridiculously high; the investing guru Benjamin Graham would have been telling his clients to sell the same stock.

So I asked our broker, “What happens if some researcher gets a tip from his barber on a stock, then he goes to the office and recommends it as a 'buy.' Then another firm picks up on it and also recommends it, and pretty soon 8 of 10 recommend it. That alone would drive up the price of the stock, but who actually did any research?” She grinned and mentioned something about the integrity of the individual doing the job.

When I wrote the letter, I'd wanted someone to do the type of research Benjamin Graham discussed in The Intelligent Investor. I wanted them to find a stock that's not on anyone else's list with a P/E that was within reasonable guidelines. Heck, by the time 8 of 10 major firms have rated it as a “buy or strong buy,” it's too late. At that point Graham and his clients would be taking their profits. In today's lingo, the Casey group would have recommended you sell at least half of it and perhaps retain some of the investment as a “free ride.”

Not long after that, our friend retired, and I switched the family accounts to a discount online broker. As I was surfing its website, I noticed a “Research” tab. I clicked on it and typed in the symbol of the stock, and up popped several available reports and a one-page summary. I realized then that what we got from the high-priced, old-line brokerage firm was not much different than the summary that had just popped up on my computer screen.

Sad to say, some of the things that I've seen passed off as research are like sugar-free Jell-O topped with fat-free Cool Whip; it has the illusion of substance… but not much else.

For the next several years, what little I had for research I did through the search engine of my online broker. It was boring, tedious, and time-consuming. Perhaps like some other investors, I wanted to find an easy way out.

At that time I was subscribing to several investment newsletters that all touted their research and weren't shy about making specific investment recommendations, something the discount brokers stayed away from at the time. Some did their job better than others.

For close to a decade I didn't use investment services because we had most of our portfolio in CDs. It wasn't until late 2008, when we began to actively self-manage our portfolio, that we began to subscribe to various newsletters again.

I quickly noticed that they seemed to be more highly specialized. The newsletters had true experts in a particular market sector or investment doing the research and making the recommendations. This isn't meant to be a shameless plug, but I read a couple of the Casey newsletters like BIG GOLD, where there are folks on the ground, photos of the various mines, backgrounds, and where the author had known the principals for a couple decades. I was impressed. I'd never read any of this kind of stuff sifting through information from my discount broker, nor had I ever seen this level of detail from the so-called “full-service” brokers either.

By comparison, I saw recommendations for companies I had never heard of and never saw references to any other firm or service making those recommendations.

In a recent edition of The Intelligent Investor, there's an article in the appendix section in which the author has tracked the career of five folks who were trained by Benjamin Graham. Each went out on his own, applied the techniques he was taught and over time put together a portfolio that made him and his clients very wealthy. However, there was almost zero overlap between those portfolios. Each had used the Graham criteria – but found his own recommendations. If 8 of 10 major firms recommended a given stock as a “buy or strong buy,” they all would have likely passed it over and moved on.

The recent Facebook IPO certainly caused quite an uproar. Goldman Sachs handled the IPO, and according to several reports sold over a billion dollars in Facebook stock the first day. Shortly afterward, the news was full of stories that Facebook's earnings were downgraded just before the offer and that information had been withheld from the general public. Only certain large clients and brokerage firms were made aware of that information. I personally no longer deal with a full-service broker, and I strongly recommend doing your own due diligence as opposed to blindly accepting any recommendation.

For many years major firms would put a stock on a “strong buy” list, and the stock may jump 4-5 points simply because of that recommendation. My retired friend told me of cases where she knew that the firm making the recommendation had several million shares in its inventory. When it recommended the stock as a “strong buy,” it was taking the other half of the trade and making a nice profit. She said “theoretically” the SEC has put a stop to that.

I recently learned that some financial research involves picks that are paid for by the companies being recommended. That's not the case at Miller's Money Forever, but until recently I was naïve enough to believe that all subscription-based financial newsletters were only compensated by their subscribers. How silly of me!

It makes sense to do your due diligence on the companies you invest in. But you should also understand the motivations and incentives driving your gurus, your subscription financial-services providers, and your newsletter authors. I now find myself reading the small print at the end of the newsletter very closely. Any high-quality newsletter will clearly state its position on this issue.

On the good side, a lot of data is now available at the click of a mouse on discount broker and other financial websites. Folks can also subscribe to excellent newsletters published by firms with large, competent research departments. This spreads the cost of expensive research departments over a large subscriber base, which in turn makes it much easier for the small investor to tap in to a huge base of investment knowledge. It is then up to us, the individual investor, to distill this information down to use with our individual portfolio.

It's easy to go along with the crowd, but true research can keep us ahead of the curve.

Until next week…