Where, oh where, have the analysts gone….oh where, oh where can they be?
Over lunch last week, a sell-side research analyst noted that few of his former colleagues continue to work in sell-side research. While the role of the sell-side analyst has not disappeared, it evolved into something very different over the past decade. No longer is an analyst widely considered to be an “ax” in his or her universe of coverage. Stocks rarely move solely based on word of a ratings upgrade or downgrade on CNBC.
So where have the analysts gone?
The simplest answer may be: nowhere. Most of the large bulge bracket Wall Street firms continue to provide research services, but several factors have made the sell-side business more challenging and reduced analysts’ visibility, including
- a disconnect between research and investment banking,
- rules covering information dissemination by public companies, and
- questions over how customers will actually pay for research.
It is very rare for an analyst to fall into information that makes for a major stock-moving call. The act of “doing” research is now more cumbersome. There is a greater focus on techniques like channel checks, store checks, and customer surveys. Institutional investors value this research, but it does not make for an exciting five minute segment on business television.
So what are clients willing to pay for?
Institutional investors place greater value on information flow. Put simply, sophisticated investors place less value on an analyst’s conclusions and more on the new incremental information that drive changes in stock opinion. In addition, buy-siders now often look at whether an analyst can provide access to corporate management teams. They focus more on facilitating management meetings than information analysis.
Does this evolution mean the eventual end of sell-side research?
It seems exceedingly unlikely. Like much of American business history, major changes create new opportunities for businesses to adapt and evolve. Major investment banks are giving a lower priority to their research efforts, but smaller and regional firms are finding new ways to both provide and monetize value-added services outside of an investment banking context.
Check out what Institutional Investor’s David Simons has to say on the subject. Where do you think it will lead?
(photo by david.nikonvscanon)
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