Analysts are supposed to analyze firms and make stock recommendations. For the most part, they seem to be okay at it. However, there is more money to be made in investment banking, and many analysts work for investment banks. Has this compromised their objectivity? It seems so. Analysts were getting rewarded for luring investment banking businesses. They were encouraged to be bullish to keep firms ”both potential and current investment banking clients ”happy. This loyalty to the investment banking side of the business comes at the expense of analysts' loyalties to the investors who depend on their recommendations. Rules aimed at eliminating conflicts of interest have been passed. It may take some time before we know if they will work.
While we have focused on the problems in the analyst industry, there are many analysts who are trying to rectify some of these problems. The Association of Investment Management Research (AIMR), a professional association of analysts, has already been working with the SEC, Congress, and others to improve the integrity of analyst recommendations. Many of the new rules enacted by the SEC have been advocated by AIMR. As with the other governance monitors that we have discussed, the misbehavior of a minority has tarnished the reputation of the majority.