Sell-side analysts used to mock their counterparts on the buy side. Now they want to be them.
The sell-side gang, which once faulted the buy side for questionable business practices, now is migrating to money-management firms amid a slew of changes in the stock-research industry, including new regulations, dwindling paychecks and mass layoffs.
The shift could result in a big transformation of the analyst industry, making it even more clubby -- and sparking increased scrutiny from the
Securities and Exchange Commission
, some say.
"Sell-side analysts are leaving in droves, either retiring or going to the buy side. The money just isn't there anymore," said Sally Yanchus, an independent consultant and former buy-side analyst for Zurich Scudder Investments and Galleon Group.
John Babyak, executive vice president of WHB/Wolverine Asset Management, has seen the industry shift first-hand: "We have piles of resumes here of analysts looking for jobs, and a good chunk of them are from the sell side," he said.
The problem for the buy side in this shift is that suspicion could arise regarding biased research and conflicts of interest, some market watchers say. If relationships between the two sides were to grow stronger, a manager at a mutual fund, for instance, could ask an analyst at a brokerage to tout a stock that the fund holds.
"The new people going into the buy side could have buddies back in their old stomping grounds and could be more willing to share information with them," said a buy-side analyst who asked not to be named. "This could surely increase SEC scrutiny."
Yanchus, the independent consultant, knows well the influence that can occur between the two sides.
"There were instances when I was on the buy side and we had a big position on a stock. My portfolio manager would tell me to get on the phone with the
sell-side analyst, and we would both grill him to put out positive or negative research, according to what we wanted. It was a very uncomfortable situation," she said. Before her buy-side career, Yanchus served as a sell-side analyst for Smith Barney, Morgan Stanley and others.
In many ways, the industry shift is ironic, given the sell side's previous criticisms of the buy side. Research analysts have lashed out at hedge funds, in particular, for pressuring them to give tainted research on stocks and for being generally underregulated.
But life has become difficult for the sell side in the past year. Following New York State Attorney General Eliot Spitzer's investigation into the sector, the SEC passed a new rule that requires analysts to certify the accuracy of their research reports and disclose any related compensation. And a number of Wall Street firms, probed for allegedly issuing tainted stock research, had to agree to a $1.4 billion settlement. Now the research analysts are swallowing their pride.
Rick Wayman, a former buy-side analyst for Fifth Third Bank and former sell-side analyst for The Ohio Company, said, "The move from sell to buy side has been going on for some time, not only because of recent regulation changes, but also following the downsizing in brokerage and the layoffs of Wall Street analysts." Wayman is currently president of Researchstock.com, an independent equity research firm. He thinks this movement will result in "the sell side model becoming extinct, a dinosaur."
The shift certainly could spark major changes in an industry that traditionally has been lightly regulated. The SEC increasingly has turned its attention to money-management firms, specifically hedge funds, in its investigations of improper activities in the financial sector. Advocates of corporate reform also have been calling for increased regulation, and their case could strengthen amid this move from sell to buy side, experts say.
"I see SEC scrutiny over hedge funds growing for sure, with officials getting more involved. It's a natural next step, the classic maturing of an industry," said WHB's Babyak.
Still, to be sure, big industry changes won't happen overnight. Experts say any transformation in the industry probably would be very gradual, especially amid the current economic slowdown. Hiring at money-management firms has slowed substantially, for example, so many sell-side analysts aren't making it in the door.
Also, a migration of sell-side analysts to the buy side needn't necessarily spell industry chaos. "In the end, it's much more up to the integrity of the individual than the actual side they're in. The industry is always changing, and you either adapt or die," said Mark Haefele, portfolio manager at Sonic Capital and a contributor to
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