Research

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Investment analysts provide the fundamental research that helps drive investment decision making on Wall Street. While money managers and traders ultimately decide what to buy and sell, the basis for their choices frequently starts with analysis provided by researchers at the major investment banks, whose work is then supplemented by internally produced reports.

Research reports are valuable because they fill in information gaps that can lead to inefficiencies in the market. Without a sense of a company's fundamental value, investors will tend to overvalue or undervalue its stock. By providing the basic information investors need to make wise buy or sell decisions, researchers help level the playing field.

Analysts who work for institutions like Goldman Sachs, Merrill Lynch or Citigroup are said to work for the "sell side" of the market. They produce reports on industries and companies, which their employers use as a basis for investment recommendations made to institutional and individual investor clients. When the financial media reports that a firm's stock rose or fell due to a change in an "analyst's recommendation," the analyst is typically working on the sell side.

The prosecutions and settlements for biased research that sprang from the technology and Internet boom of the late 1990s and early 2000s tarnished the role equity analysts play. While frequently appearing as television "talking heads," some of the best-known analysts were privately discounting the worthiness of the stocks they publicly promoted. When that came to light, their facade crumbled.

Soon after, investment banks moved to minimize conflicts of interest by breaking the direct links between their analytical and banking teams. While stock analysts still appear on television, they're now required to disclose whether they or their firm have an ownership position in any stocks they discuss.

Another change in the research world has been the rise of independent firms that sell their analytical expertise without an investment banking component. This group got a boost from a 2003 legal settlement in which 10 Wall Street firms ponied up $432 million to supply their clients with external, independent research over five years. However, the flow of revenue from the settlement will end soon, and to date the success of such firms has been mixed. Those that focus on a particular market niche, such as small capitalization stocks or narrow industry subsets, have carved out a business for themselves. The reason: Large Wall Street firms tend to put most of their energy into following big-company stocks that are heavily traded by their institutional clients. Thinly traded small-cap stocks are usually ignored, giving independent researchers a void to fill. Still, industry observers say it is difficult - maybe almost impossible - for many research-only firms to survive.

Research, it should be noted, doesn't only happen on Wall Street's sell side. Hedge funds, mutual funds, pension funds and other institutions on the "buy side" employ analysts to ferret out investment and trading opportunities. In recent years, this has been a fast-growing area. Unlike Wall Street, the value that buy-side institutions place on their own in-house research teams continues to grow.

Another factor is that much of the sell side's research focuses on investors who are "long," meaning they are buying and holding positions for a period of time. Hedge funds, in particular, can employ shorter-duration strategies, like short-selling stocks they expect to drop, which calls for a different analytical focus.

Finally, not all research professionals focus on equities. Analysts are also employed to study instruments such as corporate or government bonds, municipal securities, mortgage-backed securities and other credit derivatives.

Roles and Career Paths

Researchers spend their time scouring companies' balance sheets, talking to executives, and participating in conference calls where company leaders discuss their results and future expectations. Researchers also analyze interest rates, economies, and other areas that could provide insight into the proper valuation of different financial instruments.

The natural career progression starts on the sell side, where you'll put in many days of long hours. From there, you may try to move to the buy side via a hedge fund or asset manager. Buy-side jobs provide more freedom and flexibility. They can also be more enjoyable, because you'll be tasked with providing research that directly translates into buy or sell decisions. Typically, buy-side analysts receive bonuses tied to the performance of assets under management. Because the buy side is very competitive, it's harder to break into.

Although buy-side firms have begun hiring more of their own researchers, the sell side hasn't gone away. Bulge bracket firms like Goldman Sachs still produce the highest-quality sell-side research, but recruiters say most firms haven't grown their research staffs. In fact, many are shrinking. However, some smaller boutiques are still in growth mode.

Lead analysts, whether on the buy or sell side, seldom get hired without at least two or three years of experience, beginning as a research assistant or junior analyst working under the supervision of a more seasoned professional. A lot of people break into the business beginning with an internship.

"I always counsel students to take advantage of internship programs as much as possible," says recruiter Edward Storm of Comprehensive Recruiting in Phoenix. "Ninety-nine percent of the time you won't get hired without experience, so seek out internships to get a foot in the door. Even candidates with an MBA can be passed over because firms will go with the people they know. Time is money, and the less time spent training, the better, from the street's viewpoint."

An exception to that rule can happen with candidates who possess specialized industry expertise. Storm notes he has been able to place doctors or others with relevant pharmaceutical or health-care related expertise directly into jobs analyzing the healthcare industry.

Compensation for entry-level analytical positions on the sell side ranges from a base of $70,000 to $100,000, with bonuses of up to 100 percent of base, Storm says. Senior sell-side analysts can expect to earn base salaries ranging between $125,000 and $175,000, with bonuses ranging from $250,000 to $1 million. A small number of star analysts get more than $1 million.

The average U.S.-based buy-side equity research analyst with less than five years of experience earned total compensation of $149,000 in 2006, according to a biennial compensation survey from the CFA Institute, a professional body for those holding or pursuing the CFA (Chartered Financial Analyst) designation. While the figures climb at higher experience levels, the career path for buy-side research analysts usually leads into portfolio management.

Skills and Qualities

- Analytical and mathematical ability

- Accounting and financial statement analysis

- Strong written and oral communication skills

- Specific knowledge of markets and market segments

- Demonstrated interest in the investment process

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