Ever since the Internet bubble burst and analysts' advice became suspect across industry sectors, financial research has been under scrutiny. Now Lehman Brothers is reportedly pulling analysts from composition duties to dispense their advice directly to client reps while sitting in the sales room. Insiders say Wall Street has been using so-called "desk analysts" all along, where an analyst may advise clients through four or five reps, via telephone, sometimes while customers wait on hold. So, what's changed? In a word: compensation.
Analysts who sit with proprietary traders run the gamut from those with general backgrounds to quantitative analysts with Ph.D.s who crunch out algorithms to give traders a leg up in a volatile market, says John Mazzei, managing director of Rand Thompson Consultants in New York.
Mazzei observes that desk analysts have supplied a lot of trading ideas without getting much glory. Now while their core pay is probably the same, he says, "the total compensation has changed so that it's based on the success of the ideas generated." Winning ideas are recorded in the analysts' compensation files and form the basis for year-end bonuses. Some traders may even pay a good analyst out of their own pockets if the analyst is making money for them, Mazzei notes. But on the flip side, bad forecasts go in the compensation file, as well. So do the trader's losses, whether or not they're connected to the analyst's advice.
And there's another rub: A bad trader, or a bad pairing of analyst and trader, can cost an analyst his or her job. Firms have been known to let analysts go without debate. Mazzei's advice to would-be desk analysts: "Pick the right prop trader." In addition to knowing your area inside and out, "know who to work with. The first research you do should be on the person you'll be working for. Do your due diligence!"