Something I learned in the last year is the difference between buy-side and sell-side. I’ve always worked on the “buy side” I guess, in retail financial services, private wealth management, HNW households etc.
I became interested in the CFA so that I could better advise current and future clients, but I’ve always been dazzled by stories of 25-year old punks coming out of school with a CFA and making 250,000 working on the sell side. What Is it just my paranoia but are there huge conflicts of interest with the sell-side? I imagine sell-side to be is something like this.
You get a new job at Goldman Sachs. You are paid $250,000 a year because you have some combination of a CFA, MBA, Ivy League undergrad.
Your boss has just landed a deal with Facebook to help take the company public.
Goldman Sachs has paid $1 billion in cash for 1% of Facebook’s stock.
4.Goldman Sachs would love to unload that Facebook stock to the general public for a combined total of $2 billion
Your boss tells you to use your CFA skills to write a report justifying the new “target price”
A six-figure bonus awaits you if the company’s inventory clears out all of that Facebook junk by end of year.
If you refuse to write a glowing report on Facebook’s stock valuation, you will get fired and be replaced by some other greedy 25-year old.
8, Since you want to make money, you go on CNN and Yahoo for intereviews and explain to the general public that Facebook is positioned to be the greatest company in business history. There is no disclosure required as to whether you are buying, holding, or selling Facebook stock in your personal account.
Mutual fund managers pay you for a copy of your analysis so they can justify their decision to buy Facebook stock with their clients’ money.
FIrst, no one is coming out of school MBA with a CFA making $250k in SS ER. unless it’s as a senior research analyst at a Tier 2 or 1, bulge shop, which is almost never. shops like Sidoti hiring new kids as senior analysts straight of school doesn’t count, that’s just garbage in, garbage out.
SS ER will also never go away, companies will always need coverage. and while yes, you could argue there is some conflicts of interest, what’s being done is done (chinese wall, separation etc…)
SS research act as concierges for companies. Or so I’ve found.
That said, if someone could tell me how SS analysts get paid, I would be most interested. Is it panel reviews or % of comms or something else. Essentially how does a client reward a particular person for good differentiated research?
I would like to elaborate on a distinction. I have no qualms with Morningstar selling an (unbiased) report on what they think Facebook is worth.
I would have a problem if Morningstar printed that report and then tried to sell Facebook shares to their readers out of their own inventory.
Another thing I haven’t figured out of is a CFA would get black-listed by Facebook itself. In this hypothetical, let’s say that as part of his research, the analyst interviews Zuckerberg and some Facebook execs. How likely is it that the Facebook execs would say “write a good article on us or we’ll never invite you back to our office again”?
SS research shops don’t have someoen in the research dept holding shares of anything. in fact, all respectable shops don’t allow their research analyst to hold any stock in their personal holdings.
What any trading desk, or investment mgmt arm has of the company is totally independent.
in terms of blacklisted, it’s true a company mgmt can have a negative bias to a sell rating. there’s not much anyone can do about that. not returning calls, not really answering emails, not doing any client meetings are all things mgmt can do, and have done to people.
what the industry has done, is to switch to a more “relative” rating method. SO a sell rating would be an underperformer against your coverage, even if it’s a “outperformer” against the market
when the broker-dealer holds securities of the company and wishes to unload them (usually large & mid-caps) or when the research shop participates in capital raising activities for the company. In this case, chinese walls, trading blacklists for analysts and compliance stuff is all good and ensures that blatant fraud is avoided, but there are many ways to be compliant and still be conflicted.
when the research is paid by the issuer. I work in small/microcaps and from what I have seen, this is often the case. Yes, there is an inherent conflict of interest and you see many very respectable shops that systematically issue “buy” studies.
From what I have seen, I am rather sceptical of the value-added of the valuation part of SS ER. However, I think SS ER is a great tool for investor as it contains a very compact analysis of the company. One must perform its own valuation, though.
Yup, management teams don’t like when an analyst has a sell rating on them, and some will avoid meetings with those with negative outlooks. However, they’re usually more tolerant of it if the research is thorough, accurate, and well thought out, opposed to just saying, “this one’s a dud - Sell”. Some companies will refuse to go on non deal roadshows with SS analysts that don’t have a Buy rating on the company, so I’m sure there’s a little pressure to inflate ratings.
All the analysts that cover my company are always trying to take us on the road, so I assume that there’s some incentive - direct or indirect - for facilitating access to management. I’m not entirely sure how the SS analysts are compensated, though. Can some describe the typical comp structure for SS ER?
I remember that hedgeye analyst that issued a sell rating to kinder. he got called out by rich kinder on a conference call next day pretty badly. the kid didnt even show up for questions, but in the end kinder stock got hammered.