Investment Research: Ignore the Ratings, Read the Reports

Sell-Side Research

The "sell side " of the investment world is made of retail brokers that execute security transactions and make investment recommendations to their clients (individual, small investors) (Institutional , large money managers are known as the "buy side .") Research is produced by these brokerage firms that seek to provide value-added services to their brokerage clientele.

Big brokers such as Goldman Sachs (GS Quote), Merrill Lynch (MER Quote), Lehman Brothers (LEH Quote), Morgan Stanley (MS Quote), Bear Stearns (BSC Quote), Deutche Bank and UBS employ large teams of analysts that produce volumes of research across a wide range of investment research disciplines, including fundamental analysis and technical analysis (see Types of Research earlier).

Where do the brokerages find these analysts? Most analysts come from a variety of backgrounds, such as industry, academia and investment banking , while many go directly into financial research after graduating from college.

The 'Chinese Wall' Between Analysts and Brokers

Historically and now legally, a "Chinese Wall" separates the research and brokerage functions of a broker/investment bank from its pure investment banking role. Why? Consider the technology bubble of the late 1990s. During this period, sell-side research analysts began to mislead their firm's clients.

Some of the most nefarious analysts' research caused investors to buy valueless and debt-ridden companies at inflated prices. This was done in order to garner investment banking business and in some instances, for their own personal gains. This entire episode in investment history left an indelible stain on the entire brokerage and research industry. (Charles Gasparino best encapsulated the Wall Street research scandals in his excellent book, Blood on the Street, which is required reading for my undergraduate students.)