How Investment Banks Attract Investors to Asset Management

By Matt Krantz, Robert R. Johnson

Investment banks often employ armies of analysts who follow the economy, firms, and industries. These analysts craft research reports and make recommendations regarding virtually everything from the direction of the stock or bond market, to the value of individual companies, or the attractiveness of investments in certain regions of the world or industries.

Analysts typically are assigned specialty areas — specific asset classes or industries — and produce research reports with buy, sell, or hold recommendations. These research reports are distributed to both buy- and sell-side clients. Investment banks compete on the basis of their research quality and eagerly await the rankings such as Institutional Investor’s All-American Research Team and Zack’s All-Star Analysts Ratings.

Many analysts become stars themselves and command multi-million-dollar compensation packages. Internet analysts Jack Grubman, Henry Blodget, and Mary Meeker became famous (and later infamous) in the dot-com bubble in the mid to late ’90s.

Be careful when listening to the recommendations of Wall Street analysts. Research analysts are presumably giving advice to investors on whether to buy or sell securities. But remember that they’re working for investment banking firms, which make huge amounts of money for selling securities. Both Grubman and Blodget are barred from being involved in the securities business for allegedly violating their duty and placing their firms’ interests over their own.

These analyst reports serve functions beyond simply helping clients make investment decisions. They assist traders of the firm’s own proprietary accounts in making decisions, help the firm’s sales force in suggesting new investment ideas to clients, as well as provide coverage to the companies whose securities the investment bank has assisted in recent IPOs.