Working in his first job in a stockbrokerage, one of the first things this blogger learned was that there were two kinds of people: brokers and analysts. Brokers were paid by commission, analysts had a fixed wage. Brokers spoke to clients to make them buy stock, analysts wrote reports for clients to read. Although the differences in work ethic and method were vast, both types were united by one goal: to sell an idea.
This was a significant insight that was not too obvious at the time (the blogger was of the broker variety). There were actually two more kinds of people in the firm that the blogger would meet: traders and bosses. These latter two types were paid differently–they managed profits and losses: the traders for their own account, the bosses for the company’s. And since their pay were tied to the results of investment decisions, their goal was different from the brokers and analysts–they needed to buy an idea.
The differences between a sell side and buy side opinion could be subtle at first glance, but the implications are vast.
Seeking Alpha had a related idea referring to Wall Street research which touched on this briefly:
It’s easy to keep recommending a falling stock as a “Buy” when you don’t feel the pain of the losses personally or have to explain them to the portfolio manager you work for. In addition, sell-side analysts are often forced to adopt a “house style” by the banks they work for. That makes their research reports more formulaic, less enjoyable to read, and less creative. And in many cases, SEC rules and compliance concerns crimp the ability of sell-side analysts to publish real-time, pithy research.
Read more here.
This blogger does not mean to demonize any side of thinking (especially having been in the sell side once). It is however the “motive” behind the opinion that matters. Both sides are ultimately motivated by profit, but it changes the dynamic if that profit comes at the benefit of the client or at their expense.
“Sent from my BlackBerry® wireless handheld”