“Sell-side research departments serve only as a marketing arm of the Sales and Trading desks.”
When I tell IOI 101 participants that, some are incredulous. But in fact, if a research analyst is not figuring out reasons for clients to buy or sell stocks – any stocks – they will have a hard time keeping a job, no matter how brilliant their investing insight is.
Bloomberg ran an expose article about this a few weeks ago – have a read through if you haven’t already. It’s an eye-opening look at how the Street works these days:
Wall Street banks are having a hard time maintaining their baseline profitability, thanks to increased regulatory capital requirements (here is a great, though slightly wonkish article, that explains this dynamic in detail).
Part of the banks’ response has been is to “gate” access to its research staff to all but the largest, most actively trading clients. In the mid 2000s – when I was still on the hedge fund side of the business – an analyst at even a smallish fund could contact an analyst and ask them for a “live” model (i.e., one that allowed the user to tweak assumptions and get a new target price / valuation) or a half-hour’s chat about a company and its strategy.
In these days of lower bank profitability, the only clients who have access to this level of support are the big, active fish in the pond – hedge funds like Citadel, for instance.
This means that smaller pension and hedge funds, as well as larger ones who use a more value-oriented approach (i.e., which doesn’t trade as much), get pretty much the same research support that non-institutional clients receive: access to data but not live models, listen-only access to conference call broadcasts, and no meetings with analysts or management teams.
For well-educated principals who have a sound foundation for making investment decisions, reduced access to sell-side research may actually be a blessing in disguise. Remember that the sell-side analyst’s primary job is to offer buy-side analysts and portfolio managers reasons to buy or sell stocks – not to help principals make good, long-term financial decisions.
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