Corporate Eye

Marketing, Investor Relations and Customer Service

When institutional investors make purchase and sale decisions regarding stock, it is often done in a complex, multiparty transaction involving sell side analysts, salesmen, buy side analysts, portfolio managers and traders, with information about the company being judged against a competing universe of offerings. Rare is the large institutional stock purchase that is originated and made by a single trader sitting in front of a screen.

More often the trade occurs along the following lines:

  • Joe, a sell side analyst, publishes an analytic piece that sees a strong future for the widget industry. In order to promote his investment views on the widget industry Joe then goes on his firm’s morning call, a daily event that is broadcast out to his firm’s institutional sales force. On the morning call Joe will verbally summarize his investment thesis on the widget industry. Depending on the firm and how busy the morning call schedule is, Joe will have between 2 – 5 minutes to state his case.
  • The next step in the process occurs when Bob, an institutional salesman for Joe’s firm, hears the morning call and decides that investing in the widget industry might be a timely investment decision for some of his sales clients who consist of institutional investors – mutual funds, investment advisors, pension funds and hedge funds. Bob earns his living by knowing the investing preferences of his clients and, while not all will be interested in the widget industry, there are several that might have an interest. He then begins to call these clients and pitch the idea, noting how the widget industry would fit with their current investment philosophy and mentioning the strong research track record of his firm’s analyst, Joe. Depending on the firm that he is calling, Bob may pitch his idea to either an analyst at a buy side firm, a portfolio manager at a buy side firm or people in similar positions at hedge funds. Usually the pitch lasts no more than 1 ½ – 2 minutes.
  • In this case the investment idea resonates with Sally, an analyst at a buy side firm and she asks for a copy of the industry report. The report, which is 15 pages in length, details the reasons why widgets are poised to grow rapidly in the current economic environment and examines the prospects of the firms in the industry. Sally, who is the person in her firm responsible for covering the widget industry, then starts to do more in-depth research.

    Although she has had responsibility for coverage of the widget industry before reading the report, the widget industry is one of many she is responsible for and previously it may not have been a high priority for her. Alternatively, circumstances may have changed in the economy to make the industry more attractive from Sally’s viewpoint. Using the industry report as a base, Sally will now begin to do more investigation of the top two or three firms in the widget industry that fit her firm’s investment profile. This investigation may consist of calling up each company’s investor relations departments to get more detail on their management, business philosophy and strategy, speaking with Joe, the sell side analyst, soliciting the opinions of other sell side analysts, building detailed financial models, further research on the industry generally and speaking with industry sources and experts. When Sally feels she has accumulated enough information to formulate and back up a recommendation, she will propose the idea to her firm’s portfolio managers. The forum for this proposal will vary by firm and it might be made in a research meeting, a portfolio manager’s meeting or individually to selected managers Sally knows might be receptive to the idea.

    Often the portfolio managers will have additional questions that will entail either more research by Sally or more discussions, either by Sally or the portfolio manager, with Joe, the sell side analyst.

  • Finally, after much analysis, Jane, the portfolio manager, will make a decision to purchase a quantity of shares in WidgeCo., a rising star in the widget industry and a company that fits with the growth orientation of her portfolio. In making this decision, Jane will have to decide how many shares to buy, keeping in mind her portfolio’s overall composition. She will also have to decide if shares of other companies in her portfolio need to be sold and if any rebalancing needs to be done to stay within her portfolio guidelines.
  • Once the decision to buy is made, Jane will then call the trading desk at her firm and instruct Barry, the head trader, to execute the purchase and to do the trade through Joe’s (the sell side analyst) firm, so that commissions attributable to the trade will serve as compensation for the research idea that led to the investment decision.

In the foregoing events, there are several marketing fundamentals at play. Because of the length of this post, today we will discuss only the effect of decision complexity. Any time you have complexity in the way a purchase decision is made with lots of competing choices, the process takes a longer period of time to analyze the pertinent data and come to a decision. Rivel Research, a market research firm that specializes in studying investor relations issues, has stated in one of their studies on the buy side that it can take 3 – 5 “touches” with management before a purchase decision on a stock is made[1]. I have personally known investors who took 4 – 5 years of following a company before they made a significant investment decision.

Because these complex purchase decisions require more upfront effort by all parties involved, marketing tells us that investor relations needs to be a relationship business. It is much harder to sell a product (your stock) if you do not have rapport with the customer. On the investor relations side of the fence, this means treating analysts fairly and consistently, helping them understand your company and industry, promptly returning phone calls and meeting requests, chasing down the details that help fill in the picture for the investor and eliminating some of the informational uncertainties that go with buying stocks. In short, performing all of the essentials of good customer service.


[1] Rivel Research, “Perspectives on the Buy Side”, Spring, 2007.

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John Palizza

John recently retired as a Lecturer in Management at Rice University’s Jones Graduate School of Management, where he taught investor relations. Prior to that, John was in charge of investor relations for Sysco Corporation and Walgreen Co. He holds a MBA from the Kellogg Graduate School of Management at Northwestern University and a law degree from Loyola University of Chicago. You can learn more about John’s thinking about investor relations at his blog, Investor Relations Musings.
 
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