Richard Jenrette, who was born six months before the Great Crash of 1929, realized that the stock market was undergoing a seismic shift when he and two Harvard Business School classmates, William Donaldson and Dan Lufkin, founded a boutique investment bank in the late 1950s catering to a new type of institutional investor.

Part of their strategy in dealing with this change was fairly simple: Commissions were fixed, so it made sense to target institutions that could buy a million shares rather than going after individuals interested in buying just a handful. What they also noticed was that investors were testing the stock market waters by purchasing the companies they knew and were still allocating 70 percent of their portfolios to bonds.

Their firm, Donaldson, Lufkin & Jenrette, began putting out research reports touting the advantages of branching out from the old blue chips and into promising growth stocks. “Our reports were fairly long,” says Jenrette. “If you were going to buy stock in one of these small companies, you needed to know a lot more about it than, say, GM, where you could get in and out quickly.”

What originated as a shrewd sales tool — the comprehensive equity research report — virtually transformed a bunch of back-office number-crunchers into what would within a decade become one of the most powerful and influential groups on Wall Street: equity analysts. Institutional Investor would begin ranking the top analysts in 1972 with its now-famous All-America Research Team, but Jenrette maintains that DLJ created this rarified league of Wall Street stars a decade earlier. “The analyst used to be a sort of green-eyeshade statistician,” he says. “We invented the analyst-salesman, where the analyst was turned loose.”

The logic of the DLJ approach became clear to many other firms, as did the outsize profits the young firm was raking in. Researchers not only helped build share within the market; they seemed to increase the size of it. Analysts’ reports and recommendations worked like advertising, piquing the interest of investors when there was no other news to be talked up. In this way, analysts begat more analysts. “The firms had to use them because there was more competition for customers,” says Charles Geisst, author of Wall Street,  A History.

This rapid-fire transformation of the research industry was a long time in coming. Financial historians describe the decades between the ’29 crash and the mid-1950s as giving rise to Wall Street’s “lost generation.” A young man who would have chosen a career in investment banking instead went elsewhere. It was only in the late ’50s, when Donaldson, Lufkin and Jenrette were graduating from business school, that the promise of a postwar bull market lured the best and brightest back to Wall Street. By that time, old-line underwriters, who landed deals largely as a result of personal relationships forged in the exclusive clubs of Boston, New York and Philadelphia, were being challenged by a new crop of ambitious firms eager to win their own lucrative underwriting gigs.

Wall Street’s new meritocracy — DLJ among them — reasoned that the best way to distinguish their talents was through their equity research departments. The merger boom that began in the late ’50s continued over much of the next decade as conglomerates became a popular way for companies to insulate themselves from various levels of risk. According to Geisst, even General Motors, a longtime Morgan Stanley client, began to use other investment banks to underwrite its new issues. The preponderance of large corporations shopping around for investment banking services placed even more importance on the role of the equity analyst. Banks could use their research departments as a way to curry favor with potential clients, with the veiled promise that the banks’ analysts would provide upbeat reports on the clients when it came time to attract new infusions of institutional money.

Analysts understood their sectors and had all the industry contacts. But beyond that, their participation as part of a bank’s underwriting team impressed potential clients and carried an implicit promise of favorable coverage in the future. At first, the big investment banks didn’t follow DLJ’s enthusiastic lead; they viewed research as something of a necessary evil. In his 2008 book, The Partnership: The Making of Goldman Sachs, author (and Greenwich Associates founder) Charles Ellis says that longtime Goldman, Sachs & Co. chairman John Whitehead had mixed feelings about spending $6 million a year on the function in the 1970s. But by the 1980s the bulge bracket dominated II’s rankings and the banks’ research budgets could run into the hundreds of millions of dollars a year, subsidized in large part by the underwriting side.

Moreover, if the banks wanted to be in the business of making lucrative block trades, they had to match the boutiques’ and brokerages’ research teams, because for institutional investors analysts represented not just an important tool in the drive for higher returns but something of an insurance policy. Legal precedent such as the prudent-man rule (which stemmed from an 1830 Massachusetts court decision) as well as subsequent legislation absolved fiduciaries of blame for individual bad investments provided the portfolio as a whole was responsibly invested. For a pension fund overseen by a board with little experience or specialized knowledge that was suddenly convinced that equities had to be part of the plan, the imprimatur of an expert researcher, supported by reams of paper, held considerable importance. “They would take the sell-side research somewhat seriously and keep it on hand,” Geisst says of fund managers.

In the early 1960s automobile manufacturer Studebaker Corp. went belly-up, overwhelmed by pension obligations and declining market share. When the automaker defaulted on its pension obligations, the United Auto Workers union was left holding the bag. The UAW wanted the federal government to take responsibility for the pensions; the default triggered years of political wrangling that resulted in ERISA, which created, among other things, the Pension Benefit Guaranty Corp.

Uncle Sam agreed to insure private pensions; in return, he set strict standards for institutional money managers. ERISA also included mechanisms for IRAs and 401(k) and 403(b) defined contribution plans. In the 1950s and ’60s, pension funds and other institutional money managers did not see themselves as investment advisers. Many of them were employees of their company or members of its board of directors — people with no financial experience who did not want to be held personally liable for bad investment decisions.

Their fear proved well founded. A study by A.G. Becker & Co. in 1968 showed that most institutional money managers didn’t know their assets from their elbows. They consistently underperformed the broad market, thus running afoul of the prudent-man rule. DLJ exploited this opportunity by marketing its research to fund managers — for a fee, of course. (Ironically, DLJ never won the All-America Research Team.) The pension fund manager didn’t have to personally vet each investment; he or she could rely on a Wall Street researcher.

For all that, technology placed enormous limitations on the quality and quantity of information that an analyst could produce. Texas Instruments introduced the first handheld calculator in 1969, and analysts were among the earliest adopters, but John Mackin, a 24-time All-America Research Team member who in 1967 began a  32-year Wall Street career covering Machinery at Burnham & Co., remembers several years of working with a slide rule. Charting even the most basic metrics — growth or earnings history, for example — involved visiting a library to examine Moody’s annuals, which provided data for all public companies, then having an assistant copy out relevant passages line by line because photocopiers were not yet widespread. “Gathering the kind of information you can get in five minutes today might have taken a month,” says Mackin.

Given the commissions they were paying, institutional investors looked upon free sell-side research as their due. Indeed, as the stock market continued its tear through the 1960s, more and more institutional investors wanted in. Separate studies in 1965 and 1968 showed that both mutual funds and institutional funds were unable to beat the overall market; one inference was that they needed more stock-picking help.

Although not a precise analogue, the number of Chartered Financial Analysts increased to 3,219 in 1972 from 268 in 1960 and would roughly double every decade hence. And the pay was more than respectable. In 1971, when the average house was worth $25,000 and a new car cost $2,000, a junior Wall Street analyst started at $15,000 and rose to $25,000 to $50,000 at midcareer, with six-figure salaries for a few.

 On May 1, 1975, the Securities and Exchange Commission mandated an end to fixed commissions, instantly opening up the business to discount brokerages such as Charles Schwab and dramatically forcing down transaction costs throughout the industry; this provoked widespread consolidation and the closing of numerous brokerages. “The analysts were still in demand, but the revenue to pay them wasn’t there,” says Jenrette. “The old institutional brokerage that was a gold mine in the ’60s became a land mine in the ’70s.”