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The investment brokerage business must earn back investors’ trust in order to succeed, and a culture of integrity is crucial to that success, BMO Financial Group Deputy Chair William Downe said today in a speech to the Canadian American Business Council in Washington, D.C.

“Today, investors are more conversant with horror stories than with legacies of achievement,” said Mr. Downe, who is also CEO of BMO Nesbitt Burns, BMO’s investment banking group. “We should be congratulating Congress, the SEC and the Administration for quickly responding to the issues in the marketplace. They are doing what they can to clean up the shop and restore investor confidence in research analysis.  But stronger laws, more regulations and additional guidelines won’t be enough,” he said.

Earning the trust of investors must come from a clearly defined culture within the firms that generate investment research analysis for their clients.

“Strong leadership can change a culture,” said Mr. Downe.  “And leadership can change an organization by sending clear and unequivocal signals about what is valued and what is disparaged in an organization.”

“Sophisticated investors and research analysts need to ask more questions about the character and conduct of the people who run the companies in which we invest,” he said.  “The market will drive companies to ensure that their ethical standards and corporate responsibility are beyond reproach.”

Setting the example in the executive suite is crucial, according to Mr. Downe, but carefully established rules and guidelines are also necessary to send the right kinds of signals to the analysts themselves.  Citing his own company’s practices, Mr. Downe said the rules must focus on four issues:

• Analyst compensation should be based on the success of their stock picks, not on the success of the investment bankers;

• Analysts should operate independently from the investment firm, including being “physically segregated from investment bankers in the workplace” but not extending to a total communication ban between analysts and investment bankers.  “Because the research department is such an important part of the intellectual capital of a firm, their advice should be made available to ensure that our clients get the best advice available.”

• The research department’s advice should be tracked and publicly reported.  “Our clients expect a high degree of discernment in our analysis.”

• The analysts picks should be subjected to a real-world test.  At BMO Nesbitt Burns, this comes in the form of investment funds built exclusively on research recommendations.  “We don’t manage the portfolio and the fund to compete with the big mutual fund companies,” Mr. Downe explained.  “We do it to make sure we can eat our own cooking.”

“Focusing on the client perspective is a discipline that can be applied to fully integrated financial services providers every bit as effectively as to the boutique brokers,” according to Mr. Downe.  “Firms that have this as their number one priority may miss celebrity status at the top of the market,” he noted, “but they will build their business as they build the wealth of their clients.”

“When enough firms pay attention to the long-term perspective of their investing clients, the industry will begin to gain their trust once again – because they will have earned it.”

Established in 1817 as Bank of Montreal, BMO Financial Group (TSX, NYSE: BMO) is a highly diversified North American financial services organization. It includes BMO Bank of Montreal, its Canadian retail arm, Chicago-based Harris Bank, a major Midwest financial services provider, BMO Nesbitt Burns, one of Canada’s largest full-service investment firms, and Harris Nesbitt, BMO’s U.S. investment banking operation.

A full transcript of Mr. Downe’s speech may be found at www.bmo.com.

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