Stock Analysts' Dirty Little Secret

Upgrade, downgrade, reiterate, initiate.The vocabulary of stock research analysts entered the vernacular of the late 1990s via televised financial news with the invasive force of a bad jingle you can't get out of your head. No sooner was the word "up" or "down" breathed over the airwaves did a stock move in the intended direction like notes in an capitalist arpeggio, as newly empowered private investors pressed the "buy" and "sell" keys of online brokerage accounts nationwide.

Now that the work of analysts is on the verge of being retroactively criminalized by the Securities and Exchange Commission and New York's attorney general, however, it's time to reveal the industry's dirtiest little secret. And it's not that brokerage analysts were on the take from investment bankers or the agents of Satan.

The real skinny is that virtually no one who matters in the investment industry -- which is to say, portfolio managers at large pension, mutual and hedge funds -- ever took nine-tenths of research reports seriously. Only the public did. As I explained in my book Online Investing, analysts at the major brokerages for years have been looked down upon by institutional investors as sales support staff, a pack of kids with fancy college degrees who provided little more than PR material for the retail brokerage and investment banking teams. If they were called "promoters" rather than "analysts," the public would have had a better idea of their role in the retail investment ecosystem. The funds have their own, unbiased, independent staff analysts.

Bear Market in Integrity

Bret Rekas, a hedge fund manager in Minneapolis whose youth included a stint as a technology analyst at Robertson Stephens, is one pro who can't understand why the government has only this year determined that the system was rigged against consumers. What'll they discover next? he wonders. That professional wrestling is fake? That recipes never turn out as good in your kitchen as they do in the color photos of a cookbook?

Rekas says that the real purpose of research on the Street has always been to provide a veneer of intellectual respectability to a sales endeavor that otherwise might not be considered much more lofty than the retailing of shoes, cars or potted plants. It probably won't sound like a great revelation now to contend that research reports still serve largely as patter for brokers hitting up retail clients on the phone for commissionable trades on shares their firms have in inventory, rather than serving as an exercise in fact-finding. ...