Elizabeth Spiers

An article in today’s NYT titled “Wall Street’s New Harsh Reality” details the increasing downsides to being a sell-side research analyst at an investment bank—among them, the usual suspects: Reg FD, Big Brother-like scrutiny, lower pay, etc.
Last year, when I was still doing buy-side analysis for hedge funds, I wrote two little pieces on the same subject. The first, was a snarky banker-bashing rant (pre-Gawker Gawker) and the second was a fairly straight “sell-side analysis is dead” post. Parts of them still seem relevant and I’m lazy, so I thought I’d reprint them instead of repeating myself.
First, the snarky snarky (edited somewhat for length):
Rambling Commentary on B.S.D.s, Bad-Asses, and Vile Junior Analysts
It is a proved fact that most if not all brokers and traders lead emotionally empty lives, shot through with brittle posturing before others as well as themselves. Often their children don’t respect them. – from Spy, circa 1987.
Nick has decided to engage in one of my favorite spectator sports–banker bashing. (Substitute “investment banker” for “brokers and traders” in the quote above, and you have, caeteris paribus, Nick’s article.)
First, the obligatory and utterly transparent display of sympathy:
Personally, I take less pleasure in the humbling of the investment bankers. I have too many friends among them.
[I understand the impulse. I, too, have plenty of banker friends--don't we all?
We also have those various friends who may or may not have sold heroin to blind orphans in Tecate as well as those currently under indictment on charges of so-called "egregious" violations of federal statutes regarding the sale of small arms to well-meaning diamond smugglers in Sub-Saharan Africa. (After all, what's a little jail time if not the cost of doing business?) And deep in the cavernous recessess of our Rolodexes, we all certainly have a third-world dictator or two.
Investment bankers are par for the course, really. Can't live *with* 'em; can't sue 'em into oblivion.]

[...]

[From my former blog. Post dated February 7, 2002]
Why Sell-Side Analysis Is Dead
Largely because I’m a buy-side analyst and I rather enjoy looking snobbily down my nose at the sell-side people and making grandiose proclamations about why they’re all going to be jobless in a few years.
Just kidding.
Sort of.
I *do* think that sell-side analysis (as we know it now) will eventually be made obsolete by recent securities regulations, the commoditization of basic security analysis, and the expanding array of widely available financial tools and data. :
In December of 1999, the S.E.C. proposed the implementation of Regulation Fair Disclosure, (“Reg FD” – implemented in 2000) which, in plain English, prohibits selective disclosure of insider information. In plainer English, this means that the CEO of a public company can no longer give a sell-side analyst any material information about the company that hasn’t been publicly disclosed. (A bit oversimplified, but that’s the gist of it.) Prior to the implementation of Reg FD, part of the value of sell-side analysis was that the analyst had more information about the company than the average investor. The analyst had this information largely because he or she typically had better and more frequent access to management. Management, in return, had a fairly significant incentive to talk to analysts because their reports generated awareness about the company, and functioned as a de facto marketing channel even when the analyst’s recommendations were unfavorable.
Today, management isn’t allowed to tell a sell-side analyst anything they haven’t already told the public. *You* theoretically have access to the same information as the analyst. A sell-side analyst can’t give me any material information about the company that I can’t, with a little effort, get myself. If sell-side analysis was considered “marketing” before, it’s even more the case now.
Another factor in the devaluation of sell-side analysis is increased public awareness about the relationship between sales/trading and banking at bulge bracket firms, and saturation media coverage on the penetrability of the supposed Chinese Wall between the two. Even when the analysis is fundamentally sound, its credibility is undermined by the conflict of interest (both real and perceived) between banking and retail. Throw in a few widely circulated Henry Blodget emails about Buy-rated stock being essentially worthless and you have a very cynical retail client base that isn’t likely to take your rating system or your analysis seriously.
To be fair, I use sell-side reports to get historical data points on companies I’m screening. The quant side of basic security analysis is fairly unambiguous, and when an analyst calculates a liquidity ratio from historical data, it’s not like they can really get it wrong. (Technically, they can, but they’d be out of a job.) I do believe, however, that sell-side reports have little or no predictive value, except for the fact that a widely publicized and aggressive upgrade or downgrade can be a self-fulfilling prophecy. I heard a high-yield guy mention a New York statute against fortune telling a few weeks ago, and I can’t find it, but I’d imagine it has some implications for setting price-targets based on pro forma models for which the variable assumptions are largely subjective.
The availability of free analytical tools and financial data on the Internet is a catalyst for the democratization of security analysis, and as traditional consumers of sell-side analysis learn how to do it themselves, the demand for commercially produced research decreases. The basics aren’t rocket science. Most people are reasonably capable of learning them. In this respect, sell-side analysis adds value for lazy people, but there are no real barriers to entry for people that want to learn how to do it. That’s not to say that all of finance is like that, but if you want to know when to buy or sell your stock on a fundamental basis, you can easily learn to do it yourself.
To address the obvious question, buy-side analysis is also affected by many of these things. I *do* expect the industry to shrink on my side of the fence as well, but because buy-side analysts are responsible for allocation decisions and frequently have to go beyond the usual Graham-and-Dodd types of analysis, I think they’ll have a little more immunity to these kinds of systemic changes. If you’re evaluating fairly sophisticated hedging strategies, for example, it’s not likely that your job can be performed by a guy with access to Yahoo Finance, EDGAR, and some free time.
All of this said, I don’t think that sell-side analysis will cease to exist completely; only that it will be more overtly recognized as The Marketing Department for retail firms.