To the outsider, it seems that research analysts spend their time in a quiet room poring over numbers, calling companies, and writing research reports. The truth is an entirely different story, involving quite a bit of selling on the phone and on the road. Analysts produce research ideas, hand them to associates and assistants, and then man the phone talking to buy-side stock/bond pickers, company managers, and internal salespeople. They become the managers of research reports and the experts on their industries to the outside world. Thus, while the lifestyle of the research analyst would initially appear to resemble that of a statistician, it comes closer to that of a diplomat or salesperson.
Section One: The Players and the Product
The Players
Research Assistants
The bottom-level number crunchers in research, research assistants generally begin with no industry or market expertise. They come from solid undergraduate schools and performed well in school, but initially perform mundane research tasks, such as digging up information and editing/formatting reports. Research assistants also take over the spreadsheet modeling functions required by the analyst. Travel is limited for the budding research assistant, as it usually does not make sense financially to send more than the research analyst to meetings with company officials or money managers.
Research Associates
Burdened with numbers and deadlines, the research associate often feels like a cross between a statistician and a corporate finance analyst. Long hours, weekends in the office and number crunching sum up the routine of the associate. However, compared to analyst and associate analogues in corporate finance, the research associate works fewer hours, often makes it home at a reasonable time, and works less on the weekend. Unfortunately, the associate is required to be present and accounted for at 7:30 a.m., when most morning meetings take place.
Mirroring the corporate finance analyst and associate positions, research associates can be bright, motivated kids directly out of top undergraduate universities or at firms dedicated to hiring MBAs in research, the research associate role is the entry-level position once the MBA has been earned.
A talented research associate can earn much in the way of responsibility. For example, the research associate may field phone calls from smaller "B" accounts (i.e. smaller money managers) and companies less important to the analyst. (The analyst handles the relationships with the biggest buy-siders, best clients and top salespeople.) When it comes to writing reports, some analysts give free reign to associates in writing. Also, research associates focus on one industry and typically work for only one full-fledged research analyst. This structure helps research associates delve deeper into the aspects of one industry group and enable them to work closely with a senior-level research analyst.
To start, research assistants/associates out of undergraduate typically get paid similarly to the corporate finance analyst right out of college. About $40,000 plus a $10,000 to $15,000 bonus is a typical Wall Street package. After one or two years, the compensation varies dramatically, depending on performance and the success of the analysts in the industry group as well as the associate's contribution. For the MBA research associate, the compensation is similar to I-banking associates: $75,000 salaries with $25,000 signing bonuses, plus a 25,000 year-end bonus, are typical.
Insiders stress that the research associate's contribution entirely depends on the particular analyst. Good analysts (from the perspective of the associate) encourage responsibility and hand-off a significant amount of work. Others communicate poorly, maintain rigid control and don't trust their assistants and associates to do much more than the most mundane tasks.
Being stuck with a mediocre analyst can make your job miserable. If you are considering an entry-level position in research, you should carefully evaluate the research analyst you will work with, as this person will have a huge impact on your job experience.
The research analyst is truly a guru. Analysts follow particular industries, recommend stocks to buy and sell, and convince salespeople and buy-siders why they or their clients should or should not invest in Company XYZ. The road to becoming an analyst is either paved with solid industry experience, or through the research assistant/associate path.
Full-fledged analyst positions are difficult to come by. The skills required to succeed as an analyst include a firm grasp of: 1. the industry and dynamics of stock picking, and 2. the sales skills required to convince investors and insiders alike why a stock is such an excellent buy. An analyst lacking in either area will simply not become the next "II-rated" star.
Research analysts spend considerable time talking on the phone to investors, salespeople and traders, pitching buy and sell ideas or simply discussing industry or company trends. Everyone tries to get the research analyst's ear, to ask for advice or (as we will discuss in-depth later) to pressure him or her to change a rating or initiate coverage of a particular stock. Analysts also travel regularly, visiting buy-siders or big money managers and companies in their field. Indirectly, they are trying to generate trading business with money managers, research ideas from companies or trying to build a reputation in the industry. All in all, analysts must be able to convincingly and quickly pitch an idea, and defend it thoroughly when the time comes.
In this atmosphere, research analysts must scrutinize every company that they maintain under coverage. Any news or company announcements will spur a deluge of phone calls to the analyst, with questions ranging from the big picture to the tiniest of details. They also must maintain a handle on an extremely important aspect of any company - the numbers. Inaccurate earnings estimates, especially when they are far from the mark, reflect poorly on the analyst. Why didn't an analyst know the company stock was going to come out with such low earnings? Or, why didn't the research analyst know that industry growth was slowing down? The analyst is responsible for staying on top of these things.
In terms of pay, compensation packages for research analysts run the gamut. Some II-rated "star" analysts in hot industries command multimillion dollar annual packages, especially during bull markets. Research analysts hired out of a top MBA school, on the other hand, will start with the standard fare deal that corporate finance associates make. Sometimes the pay is even slightly less, as analysts can fall into a pay-scale formula that, at an early stage of their careers, does not match Corp. Fin. salaries. Most banks figure their compensation for analysts with formulae that are usually incomprehensible to even the research analysts. The factors that go into analyst compensation typically include a mix of the following:
- The performance of stocks under coverage (meaning that if their stocks perform like the analyst predicts, they get paid well)
- Trading activity within the firm of stocks under coverage
- Corporate finance business revenues of companies in their industry
- Performance evaluations of the research analyst by superiors
- Institutional Investor rankings (Once a research analyst finds himself listed as an II-ranked analyst, the first stop is into his boss's office to renegotiate his annual package.)
The Product
Industry Research Reports
To establish oneself as a knowledgeable analyst, many researchers begin by writing and issuing an "industry piece." For example, an industry research report on the oil and gas sector might discuss issues such as commodity prices, the general outlook for the sector and valuations of companies in the industry.
The time required to generate an industry piece depends on the length of the report, the complexity of the industry, and how important it is to show expertise to investors and management teams in the industry. For completely new industries for new analysts, a full six months or more is given to enable the analyst to fully understand the industry and develop a thorough report. Once it is printed, salespeople will use an industry research report to "get up to speed" and learn about a particular segment.
Touted as industry gospel, industry research reports take substantial time to produce and earn the firm nothing except awareness that the investment bank "follows" an industry and has expertise in that industry. However, the brand equity built by an industry piece can be substantial and make corporate finance banker cold-v ailing a much easier process.
Company-Specific Research Reports
Once an analyst's industry piece has been written and digested by the investment community, the analyst focuses on publishing research reports on specific companies. To create a well-rounded research universe, research analysts will typically write on the top industry players, as well as several smaller players in the industry. Company-specific reports fall into three categories: "initiation of coverage," "updates" and "rating changes."
It is crucial to note whether an investment bank has provided corporate finance services to the company under coverage. Usually at the end of a research piece, a footnote will indicate whether this is the case. If so, investors should be careful to understand the inherent conflict of interest and bias that the research report contains. Often covering a company's stock (and covering it with optimistic ratings) will ensure corporate finance business, such as a manager role in equity offerings, M&A advisory services, and so on.
Analysts usually cover a particular (small) universe of stocks, but some analysts, called market strategists, survey and report on market conditions as a whole. Most large banks publish market commentary reports on a daily basis (sometimes even several within a day), augmented with weekly, monthly and quarterly reviews. Included in such reports is information on the performance of stocks in major market indices in the U.S., major markets worldwide, and in various sectors - such as transportation, technology and energy - in the U.S. Some of these commentaries offer forecasts for the markets or for particular sectors. Naturally, economic data is paramount to stock market performance overall and thus pervades market commentaries.
Economic Commentary
Similar to a market commentary, economic reports are also published periodically and cover economic indicators and trends. These reports are often stuffed with graphs of macroeconomic factors such as GDP, inflation, interest rates, consumer spending, new home sales, import/export data, etc. They provide useful information regarding government fiscal and monetary policy, and often link to fixed income reports. Often the same market strategist writes both the economic commentaries and the market commentaries for a firm.
Fixed Income Commentary
Analysts covering the fixed income markets publish periodic reports on the debt markets. Often tied to the economic commentaries, fixed income market reports comment on the performance of various fixed income instruments including U.S. government securities, mortgages, corporate bonds, commodity prices and other specialized fixed income securities.
Stock Research Ratings: What Do They Really Mean?
The five-point scale for rating stocks is ubiquitous in banking, but the definitions that banks refer to do not accurately measure what the analyst believes. The following scale reflects the general consensus on stock ratings, but keeps in mind that these vary by firm.
Many firms have done away entirely with the five-point scale, some have expanded it, and some still adhere to it. For example, DLJ rates stocks qualitatively, from "Top Pick" to "Buy" to "Market Performance" to down. Conversely, Merrill Lynch has engineered the most complex rating system on Wall Street. The rating system includes three categories (each with a separate rank), including Short-Term Rating, Long-Term Rating, Risk and Dividends. An investor must carefully "read between the lines" to truly understand the comment in a research report. To illustrate one firm's rating scale, consider Merrill Lynch, which has expanded the standard 1 to 5 scale and added dividend information and a long-term versus a short-term opinion.
