The Lowdown on Investment Banking Research

If you have a brokerage account, you have likely been given research on stocks that you asked about. Research analysts - the intermediaries between companies and the buy-side, corporate finance and sales and trading - form the hub of investment banks.

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.

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.

Research Analysts
The research analyst, especially in equity, 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 (an analyst highly rated by Institutional Investor ratings).

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.

Note: As they progress in their career, research analysts receive titles similar to investment bankers, namely VP, SVP and ultimately MD. However, the tasks of a research analyst tend to remain somewhat consistent once the analyst level is reached, with perhaps more selling of research and traveling involved at the most senior levels.