Why is market research disrespected?
I read some of these reports by top market research firms, and some of the insights they come up with are pretty fucking smart. It seems the analysts that write these reports could have easily worked on the sell-side or the buy-side. Their writing and analytical skills seem as good or better than those going into i-banking. What am I missing here? Why the hell are they doing market research? And a meta-question for that -- why is market research considered a shitty field even though it comprises a big component of what the growth buy-side shops actually do? You never hear of market research analysts exiting to VC/PE. They actually have to think in their job, but they get paid a fraction of the amount, are considered unprestigious, and have no career growth.
They don't put money down behind their calls.
Agreed, but i-bankers don't either. And i-bankers can exit to PE, market researchers can't. Let's say the market researcher also was well versed in financial modeling. Still can't.
They don't directly generate revenue, but I agree, they're under-appreciated.
1) Making an observation in a report is very different from putting on a trade to make money from the same observation.
2) Bigger picture, respect in most businesses stems from pay (with a few exceptions such as used-car salesmen and personal injury lawyers.) In general, labor is cheap and capital is expensive. It's a lot cheaper to start a market research firm full of brilliant economists who can make good calls than it is to start an investment bank and underwrite a deal.
Banks provide access to capital, even if they aren't "making a call" so to speak with their own money (though I think that statement is not entirely true especially when PE sponsors are involved-banks trip over their own boners trying to provide the financing for a KKR buyout), which is why bankers are paid better than other advisors like lawyers and accountants and why people choose to work for banks rather than, for example, ratings agencies given the choice. The spiral continues from there-the "best" (paid, at least) people work for the "best" (paying, at least) firms doing the "best" work and exit to the "best" opportunities.
As someone who works in ER, I'm going to have a go at this.
1) The fact that you don't put any money behind your analysis is huge. I can come up with a model or justification for damn near anything I want. I can back test the theory 30 different ways and show you why there is NO WAY this is going to go bad. Then when it goes bad I shrug and call the next client. (I do proprietary research so we sell the reports)
2) A lot of the people I work with would NEVER make it in a banking type environment. You think some of the people you work with are dorks/nerd/whatever...you have no idea. The lack of client interaction for some of the analysts here is the only reason we are still in business. We had an institutional client bring in food one day at the end of the quarter and I honestly think that there are more social people on death row. It was fucking painful. Granted not all of them are like that but the good ones (myself included) will eventually exit to a HF or something.
3) You get much less exposure to the buy-side as a rule. PE firms and HF's are always on the prowl for good investment bankers that they can pick up. Rarely is that the case with ER. Most of the exits we have are to mid sized HFs and AM firms.
4) Kind of as a caveat to the first point. It can be hard to quantify the impact or accuracy of your research. Sure, I can say that I have been 80% accurate in my analysis since XXX date but so what? What if one of the times I was wrong, I rated something a strong buy and it blew up? That isn't something that can be shown to firms that could potentially hire me and they know that. Not only that, but what makes me right or wrong if and when I rate something a 'strong buy'? If it does up 30% that was obviously a good call but what if it went up 3% was a 'strong buy' still the right rating. Of course, you put target levels and prices into your analysis and report but that still leaves a lot of room for interpretation. This goes back to the whole size matters thing. Sure I can be right 80% of the time but what really matters is the size of those winning trades. There is no PnL.
That was kind of a rambling response but here it is in short. You have no money behind your trades, you aren't normally in a position for head hunters to come calling, you cannot quantify your success in any meaningful way, and you have to beat out the Ibank crowd for the spots that you mentioned.
From one research guy to another, I completely disagree. I work in research at a good mutual fund (Templeton, Wellington, T Rowe, Capital Group).
Regarding point no.1 and 4: Once you get past the associate analyst level and become a full fledge analyst, almost 100% of your bonus is tied to your analysis/recommendations. A lot of times the performance of your recommendations are tracked in the PM's portfolio to determine your year end bonus. It's also really hard to advance if you constant put out lackluster recommendations because the PMs arent going to trust you and that's crucial in moving up.
Regarding points no.2: We dont need the client interaction because we don't have clients. You also dont need much client management skills at a HF unless you are in an investment relation position or if you are at the very senior level and need to smooze the people investing in your fund.
Regarding point no.3: I guess you are speaking from a sell side research perspective because I dont see how I can get much less exposure to the buyside being on the buyside by definition. We do have a bunch of people who have sell side research background. As a person in research, you can advance into an Associate PM position on the PM track, or a good number of people move onto good hedge funds once they reach the analyst ranks. Then a number of analysts become senior analyst (career analysts) because they choose to do so. Obviously you arent going to get a call from PE anytime soon but then you probably should not have been in research in first place if your end game is PE because it's not that relevant.
Maybe I'm missing something here, but equity research analyst at the main investment banks are not disrespected at all -at least here in Europe-. Some of them even have some sort of "guru status" and they calls actually move stock prices.
Yes, they make less money than investment bankers, but they still make a very good living and have much better hours...
I don't think he meant disrespect as much as their exit ops arent as sexy in some cases. You have to realize too that the guys who move markets with their analyses are more the exception than the rule.
Investment Bankers do "deals." ER doesn't have exposure to "deals." In middle market PE, we look for candidates who have strong exposure to the deal process and know what a Letter of Intent is or what is included in a Stock Purchase Agreement. The learning curve for ER is infinitely steeper than it is for qualified bankers and therefore it doesn't make sense to hire ER folks into a PE shop (with some exceptions, obviously). Sure, both do financial modeling and both are in responsible for researching markets, but the overall job function of the banker is vastly different and caters towards PE far more so than ER does.
When you're a senior research analyst, you can be tremendously respected in the industry. People like Meredith Whitney, Gene Munster, Imran Khan, are very well known and extremely well-regarded. Let's just say that if you're a senior research analyst at a BB or MM in an impacted industry, you'll be fine.
But the problems with ER are the following:
1) Putting out opinions out there is not the same as making trades on them. So right off the bat, it's pretty easy to go with the flow and say stuff like "internet traffic is going up so we rate Cisco as a buy".
2) A lot of the quality from research reports is actually extremely poor. The initiations are great (and are a lot of work), but once you initiate on a sector, from then on it's on cruise control. Endless cycle of listening to the management and regurgitating their guidance into your model. Also, since so much in this business depends on how fast you can get a report out, you'll CONSTANTLY find awful spelling and grammar mistakes, not to mention mistakes in the model, all of which hurt the eye of an anal-retentive IBD analyst who would get chewed out for such work quality.
3) Many supporting roles in ER are not very good jobs in general. I have friends who exited into ER from IBD and while their hours improved, the meaningfulness of their jobs hasn't. When a senior guy tells you go through Gartner /IDC / government database all day and find certain extremely specific data, you start reminiscing about the time when you had to do the same retarded work, but for transactions and getting paid much more.
4) Oftentimes research is really an after-market service you offer to your underwriting clients; if you're MM or MBB, research is more important for winning equity deals than IBD. But since research rarely pays for itself from institutional investor fees, bankers tend to dismiss them as a cost center.
On second thoughts, it might be different on the sell-side because there's really not much mechanism for accountability.
This is really the key difference. You make some excellent points and its good to have both perspectives on the issue. I definitely got some insight I didn't have before. How does your PM monitor performance and tie it to your bonus? Meaning how does he assign a price/value to your work? Just curious since maybe I can bring it to my boss and get a little extra coin ;)
Will buy side AM shops (think Wellington, Dodge and Cox, etc) bring on sell side analysts (think Morningstar, Sanford C Bernstein, BB equity research) and vice versa? I assume so, but how likely is this transistion?
At the core, the work is the same, with the obvious difference being sell side analysts don't put money behind their recommendations.
No stakes on research
At my BB the equity research team have a virtual portfolio. It is down....a large amount lol.
On the other hand the 911 parked outside belongs to a research guy.
Some of you understood the progression of the question; others answered a question which is easier for them. Obviously, research is less compensated because you don't put institutional/prop money behind calls (thus less comp than HF/PE) and you are not directly generating substantial revenue (thus less comp than IB).
But the analytical/writing skills of a lot of research analysts are a lot better than many sell-side analysts. Tell most IBD analysts to prepare a substantial and insight-filled industry report from scratch and they will do a terrible job. They are used to highly process-driven, repetitive work with less thinking involved (no hate, just truth for first few years of IB).
This leads to a question of why these top research analysts are doing research when they could use their skills in much more lucrative areas. A response to this could be that they are socially inept and have no client management skills. But this definitely does not apply to all of them. Also, they are almost universally ignored for employment by buy-side shops in favor of IB analysts. Why aren't their skills more sought after? Or perhaps they simply self-select and feel more comfortable in research roles, regardless of comp.
Modeling skills > copy/paste writing skills.
Don't kid yourself, all research reports read the same. Copy paste words and use the same jargon.
Not entirely true though I will say that if you go back and look at old reports, the language can be similar.
I do agree that they try to appear smarter and more legit than they actually are; I liked acidtest's comment that "once you initiate on a sector, from then on it's on cruise control. Endless cycle of listening to the management and regurgitating their guidance into your model." They can't risk putting any truly controversial things in there.
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