Career Ladder: Equity Research vs. Investment Banking - (A Definitive Guide, Part 3)
Hey everyone...sorry to take so long for part 3 of equity research vs. investment banking. For those who missed the first two parts, see the links below:
Work/Life Balance: Equity Research Vs. Investment Banking - (A Definitive Guide, Part 1)
Exit-Ops: Equity Research Vs. Investment Banking - (A Definitive Guide, Part 2)
In today's edition, I wanted to discuss the career ladder in equity research vs. investment banking. As you may have noticed in my previous post, I lean toward preferring ER over IB. However, as far as internal promotions go, it is a slam dunk win for IB. Note that I left IB fairly early for equity research. So, I leave it to other commentators to fill in the career path beyond the VP level.
Investment Banking
The greatest advantage of investment banking over equity research is the rigid promotional structure of the hiearchy. After 2 to 3 years as analyst (depending on the bank), you move to associate. Another 2 to 3 years of being an associate, you have a shot at VP with salary bumps and bonus bumps along the way.
The Junior Level
At the junior level, you are basically guaranteed a promotion every year. A year 1 analyst is bumped to year 2. Furthermore, with retention issues these days, you're basically guaranteed an associate slot at year 3 or 4 unless you're a bottom bucket performer. With so much churn and turnover, you're basically always guaranteed a spot as someone above you is always quitting, taking an exit-op, or moving up as well. This constant mobility is non-existent in equity research, and we'll get to that in a minute.
The only frustrating thing about this structure is that while the promotions are certain, you can't hop over steps. Even if you're the best first year analyst to ever grace the halls of your bank, you will not get promoted to associate any sooner.
The jump from Senior associate to VP
The first point of real friction in IB is reaching the jump from Senior Associate to Vice President. This is where the bank has to decide whether they actually want you talking to clients. You might be the best pitchbook monkey on the planet, and you may build incredible models, but if your MD doesn't believe that you have the presence or finesse to meet with clients, you're not making it to VP. It's not really fair as you're now judged by a criteria other than what your job role has been for the past few years, but life is life. In a few cases, I've seen someone who is not great with clients squeeze through to VP but they don't progress any further beyond that.
Now, at VP, you may get to pitch some of your own clients that the MD doesn't have time to reach, but at the end of the day, you're still working for the MD's team and his bottom line. While this may seem like a strange point to bring up, we'll get to that in the equity research section momentarily. For anyone with higher level experience in IB, feel free to fill in the path to ED and MD.
Equity Research
The best thing about equity research and the worst thing about equity research is that there are only two positions which matter, associate and analyst. Unfortunately, there is no direct path to becoming an analyst.
While it seems like a smaller hierarchy, the two positions are worlds apart. I've seen it take anywhere from 2 to 8 years to become a full analyst. With no hierarchy, there is also nowhere for you to climb.
Your typical bank has 2 to 4 analysts covering an industry and that number is for the most part fixed. Unless you're in a hot and rapidly expanding sector, it is very unlikely that your bank will want to go from 3 analysts to 4 analysts, i.e. promoting an associate or finding someone else with more experience.
Furthermore, you have to understand that being promoted actually hurts your boss, the analyst. Unlike an IB analyst, an ER associate takes a long time to train and learn the industry. An ER analyst is not truly comfortable with his associate writing notes until they're 6 to 12 months on the job. A 3-year associate basically writes all your notes for you - it's wonderful!
Comparing promotions
In IB, promoting an analyst to associate is great for the MD as he gets to keep talent on the team. In ER, when an associate is promoted, the lead analyst LOSES the talent. The ER analyst now has to hire and train a new associate. Hence, an ER analyst always has an incentive not to promote you. If you assume your own coverage universe, you no longer work for that analyst other than through occasional industry reports.
The competition
Worse yet, you are now competition! Every ER analyst is ultimately in it for himself. If sales is pushing your stock ideas to clients instead of his ideas, that's not good for his trading revenue. Sure, as a new analyst, I doubt that you will cannibalize a lot of revenue from the other analysts, but you will still steal some of it. Even if their revenue decreases by 10%, that's 10% more that could have been in their pocket. A promotion literally means competition and guess how many people on Wall Street want more competition in their office....
So, as an associate, your only shot for a promotion is for an analyst to leave at a point in time where you have enough experience to take over. However, this doesn't mean that you will necessarily be allowed to do so. The research director and the head of your group decide if you're ready or not. This is a decision very similar to the IB associate to VP jump. Are you actually good at talking to clients and driving sales? If no, they will hire someone from the outside, and you'll be their new associate. Then you have to wait for someone to leave again, but if 1 of 3 analysts is brand new, the chances of that just got slimmer.
The route to becoming a full ER analyst
Unfortunately, the BS doesn't stop here....let's assume that you've gotten lucky and have managed to land an analyst position. Either, the bank added a new analyst for a booming sector and you slowly added your own coverage or someone left the firm. You still won't get a fair shake within the group. As the junior analyst, you'll be given the companies which the other analysts don't think will earn any revenue. On top of that, when the next new hot IPO comes out, guess who is not covering it? Each quarter, you will be judged by the same revenue metrics as the senior analysts, but you'll be more junior and will have the worst coverage universe possible.....in summary, the route to becoming a full analyst completely sucks.
Lessons Learned
Clearly, the most apparent lesson is that IB has a much better career ladder than ER. However, in my opinion, the real lesson here is that you should go into either IB or ER with the right mindset and expectations.
In IB, you need to realize that if you're not the most sociable person, you either need to become one or leave by the Associate to VP jump.
In ER, you have to understand that the deck is very heavily stacked against you. View the the job as 2 or 3 years of experience before jumping to one of the many exit-ops. If you get lucky and are promoted to analyst, then that's great! But don't obsess about making it to full analyst because it probably won't happen no matter how good you are.
Well, thanks for reading....sorry for the length again, but I aim for these posts to be more definitive and nuisanced than most. Hope you enjoy it!
The thing this doesn't really touch upon, and really the reason I never considered ER, is the industry trajectory.
In IB there is a direct tie to revenue generation, i.e. investment bankers are hired to sell a company and generate a fee directly from that. ER is basically a cost center and in a world where trading revenues are declining I would think ER is one of the first places to cut. Sure there is some ties to sales people pushing your companies covered but that is far more fungible vs. a direct M&A fee.
IMO, IB industry is largely booming and will likely continue to do so. ER is probably stagnant or probably even more likely declining (alongside S&T). If given the choice I think ER is way more riskier long term vs. banking, has lower pay and has worse exit opps (top HFs will choose top IB analysts over ER the majority of the time)
I think there is something to be said about the work-life balance benefits though which are clearly superior in ER
This is purely my personal experience and probably does not reflect the experience of other people. Worked almost 12 years in finance; so take it with a grain of salt.
Did 2 years at BO&MO Financial Analyst (out of college), 1 year of IBD Associate (out of grade school), then 2 years of Equity Research (Associate), then 2 years as Business Development Manager, then 2 years at Private Equity Senior Associate, then now 2 years at IBD VP.
I would recommend that if your goal is to run a successful business afterwards (most likely as the CEO or CFO but more like fundraising type), IBD would probably be the better route. A few surprising things that you will find that:
Investment bankers are much more cunning; I think it is due to the nature of the clients that we deal with everyday you have a much more sense of someone bullshitting you. I did not feel that way while I was on the Equity Research side. I find most of the IBD guys are way more street smart - they always make me feel like someone is going to fuck them over but still smooth enough to deal with clients and investors; PE guys come across as "fuck you pay me" sort of attitude and the conversation always come across "i am smart and i want to know how are you going to screw me over"; that personality usually don't work out when moving from PE back to IBD side; just a thought.
You get much better at deal origination, structuring and execution, which are much more useful tools when you run your own business; equity research is good in explaining the business drivers and equity story of your business to justify valuation but it stops there. Deal structuring element is significantly missing in Equity Research. The devil is in the details on how you structure your deals and all sort of contingency that comes with it.
Work Flow Management, I think IBD provides much more experience in dealing with multiple projects, managing teams and buy-side negotiations that are much more useful down the road. There are also much more variation in terms of work experience (crave out, distressed, IPO, RTO, De-listing, PIPE). ER - initiation, sector, market, quarter updates.
Tried my hand on Private Equity; felt like I was spending way too much time on portfolio operations like fixing companies. And there was also way too much work on board meetings, organization restructuring, and portfolio management that I did not enjoy.
Tried Business Development; it was too fixated on a particular sector and in the end, I got really sick just covering that one sector and there was not much exciting things to do.
Thanks for sharing good article.
As I recently move from ER to HF, and part of the reason is my rather gloomy view on ER career progression in near future, maybe I can also shed some light on potential issues ER juniors could be facing these days:
Boss as a career progression hurdle
There are increasing number of cases that juniors left sell-side or ER because of dissatisfaction with their bosses, not because of performance or culture, but career progression: In order to progress in career, gaining stock coverage is of upmost importance for ER juniors. However this creates conflicts of interests between sector head and the junior, because 1) by gaining stock coverage, ER junior gained access to clients who used to contact with the sector heads; 2) gaining stock coverage gives ER junior chance to establish their own reputation on the floor, inc S&T desk; 3) junior ER can share more bonus if their coverage does well, and thus taking money away from their boss's wallet as well. You may ask: come on...this has always been how ER look like... The thing is this further escalates these days because of MiFID2: MiFID2 these days has put enormous budget pressure on front offices inc. ER. Imagine if you are the department head, on one hand you have a junior who perform quite well, gaining internal reputation, votes start to ramp up, and most importantly, even if I increase his /her salary by 30% per annum, he will still be happy about it; on the other hand, the sector head took away usd300-400k per year, and keep complaining about his/her bonus every year. My job might be risked if I cannot achieve the country head's budget cut target this year, then why not bet on the junior? Sector heads also notice that, and that's why lots of juniors, once receiving commitment of coverage, are frustrated about their initiations being delayed again and again, for some cases I know, by 2-3 years.
Low reward-to-effort ratio due to MiFID2, not just market downturn
I will not explain details of MiFID2 here as it is well-explained everywhere. Trading commission in UK/EU declines by another 20-30% in 2017, and in some cases, 50%+. Some banks even decide to cut long-only sales because of their drastically lower trading commission in compliance with MiFID2. This leads to poor bonus to junior ER/sector heads even in last year, when equity market recovers a bit. In short, reward-to-effort ratio becomes substantially lower in ER these days, and with MiFID2, it will be a structural issue going forward, but not only due to market downturn as suggested by history.
Still a good way to move to buy-side
ER is still a good stop before moving to buy-side, because it gives you 1) access to some prominent PMs if you can outshine peers, 2) basic fundamental training on analysis, pitching, critical thinking, etc; 3) platform to connect with future-PMs on the floor; 4) adding value to your resume if you cover good sector like TMT/healthcare etc.
Is ER that bad? Yes...if you have a bad boss/sector
Boss is important in ER. If he/she is good, you gain room to grow, clients to connect with, proper training to prepare for future challenges. If not, you may face frustrating situation like initiations being delayed, being a data monster for years and no one knows you, which lead to poor pay and career progression. Sector also matters as a good sector usually has better bonus and more headcounts, which gives more reason for your boss to give you room to grow when the time is right, and more incentives for buy-side to hire you.
My suggestion is therefore straightforward: leave when your boss/sector is not good, changes are important for ER when you realize your career progression is stuck.
my personal ranking: Internet>Tech hardware/Auto/Healthcare >Others (inc. chemicals) >Cyclicals>Oil&Gas (ex.chemicals)>Telco
When we talk about investment, and therefore buy-side demand, cutting edge themes are always the most interest one. In the past decade, and probably for the coming few decades, Internet definitely is the top choice: in terms of client interest, you have not only FANG, or BAT in China, but also tons of interesting companies like Spotify, Twitter, Match Group, you name it. too many companies to cover means you have certainly space to move up the ladder, and there are still tons of internet companies awaiting for IPO, which means the deal income is also lucrative. In terms of lifestyle, you can use various apps and play mobile games during work. That's important but not just fun too, and I am not joking, imagine you need to go Permian field and look at those pipes 4 times a year, or suddenly going to a mine in Eastern Europe spending 8 hours of ride in a minivan after getting off the plane just to look at pieces of rock. In terms of pay and job security, internet companies are liquid, and never lack initiation ideas. Your boss will also have the biggest bargaining power on the floor. Your job reward-to-effort ratio should be optimal, if not the best, comparing to other peers on the floor.
Auto/healthcare follows next, auto is good mostly because of not the EV era which is interesting, but also the revolution of auto parts like ADAS, batteries, and later, 3D mapping and internet of vehicles. Healthcare never gets old, esp after the emergence of biologics worldwide. Besides healthcare is such an expertise that it can adds value when you change job.
Cyclical and O&G could be a controversial pick as the least preferred sector to stay in research, esp for oil when oil price finally breaks USD80/bbl this year, but the industry volatility will make your life in office pretty tough not only during market downturn, but also when you failed to call an industry rebound or collapse, which is common. If you can cover hot chemicals name like battery names, it is still good, but first you need to compete with the auto team, and materials team...
Telco...simple model, nothing much to update from time to time... good thing is telco names are liquid so they need to be covered, bad thing is you will be bored, but these days should be relatively better due to the 5G story still ongoing (p.s. I personally don't think it will generate the hype of 2G-3G and 3G-4G though).
The only thing I learned from my ER stint is that active investment management is bullshit and the equity research industry is dying due to two factors: automation and regulation. The proportion of humans participating in daily trading volumes in equity markets will gradually decline, so the wallet share of human, buyside clientele will continue to shrink as funds fire out traditional PMs in order to make room for data scientists. All of this along with Mifid2 relies on incredible luck for a equity research associate to land a stable buyside gig. Further, there are tons of shitty research being published, and nobody reads your first-look that you hastily produced at 6am in the morning.
If you work for an insane boss who is just a corporate access whore, asking you to do manual intensive data modeling, in a sector that is out of favor, working at sweatshop like Wedbush, Guggenheim, UBS, Credit Suisse, Jeffries, Cantor, Macquarie, seriously consider if you personally believe you have an ‘edge’ that will make you succeed even if you somehow land into a serious buyside gig that isn’t funded by a well-connected Jewish kid who was able to raise funds by flaunting his HBS pedigree at his synagogue.
The top decile of hedge funds in terms of performance each year are always different. The spread between the top and bottom decile performance is incredibly thin. These two facts are one reason why passive funds are so popular. Further, the probability of working for a bad analyst is high. Equity research should not be seriously considered as a career anymore.
100% agree with this.
There's really no reason for equity research to exist if you think about it. A big part of this is because trading is now fully automated and basically a commodity. No need for a bank to try and drive trading revenue, especially in equities.
Therefore, ER needs to stand on its own legs in terms of alpha generating content. And this is non-existent because if they were any good at this they would be managing their OWN money.
Let journalists and data providers like Bloomberg Intelligence take it over. 90% of sellside is basically reporting the news anyways. No one cares about opinions. Most are just a mouth piece for mgmt.
The only question then becomes corporate access. That power needs to slowly transition to the busyide. It's asinine that the real owners of companies are not allowed to ask questions on earnings calls. It's an outdated system that will eventually go away.
For anyone looking for an entry-level gig, look elsewhere (banking, tech, etc.).
I somehow see your point of saying this, but I still think ER has its value, and mostly from a buy-side business standpoint.
Firstly is the difficulty to build an internal research powerhouse: actually some of the big buy side may agree with you from what they did as well! At least 1 HUGE long-only once attempted to build its own internal research platform to cope with declining demand of sell-side. However the project somehow failed, because: 1) the quality lags behind sell-side due to response speed to news feed and experience gap versus sell-side. They later abandoned the plan and switch back to reliance on sell-side.
Secondly, there are too many small-sized fund below USD500mn AuM which need to rely on sell-side research. For funds at this size, a front office team of say 5 people or less is common, and they need to deal with various trading, operation, legal, marketing and admin tasks apart from research. There are just too many funds lacking the capacity to do so.
Thirdly, you mentioned that journalists and BBGI can take over sell-side research. To some extent they can provide news feed in a timely manner, and sometimes provide insightful articles which are value-adding to investment as well, but as a platform they are not resourceful enough to recruit talents who can constantly predict the right thing in future, and their focus is still more on generating something timely, but less on insights. Sell-side research is more resourceful, by leveraging on various departments, esp PB, IBD, corp events, and global scale, to liase with company mgmt and industry expert to generate real insights. I know, analysts who can generate alpha are rare, but what buy sides really care is the insights which help them build what they believe is alpha-generating, not copying sell-side idea and trade. So i will say logical insight is already good enough, and from buy-side standpoint, this insight standard is still not something that journalists or BBGI can reach, but the hard truth is only selective analysts on the market on sell-side can hit this standard.
That's why, sell-side, in my opinion, will certainly exist, but under MiFID2, there will be a prolonged period of consolidation and low-quality sell-side research will be phased out. This has already been happening in the past 3-4 years, and will continue for sure.
Seems like the most of the people on this thread have had a bad experience on or with the sell-side, which is unfortunate (but understandable), so I’ll provide a few viewpoints from a more positive perspective.
Regarding the topic of the thread and upward mobility within research, making the jump to analyst is indeed pretty hard and you need a certain amount of luck; however, there is a solid ~4-5 years or so of progression as an associate out of undergrad that shouldn’t be discounted. You still get increasing pay each year and after a couple of years most will be promoted to a “senior” associate (or other firm equivalent) which comes with somewhat increased responsibility and of course pay. In addition, the associate analyst position (when an associate starts fully covering some names) is available but usually pretty competitive. Responsibility/satisfaction of the job naturally increases with your knowledge and experience within your sector and ability to be an extension of your analyst. Also, the idea that your analyst doesn’t want you to succeed or won’t go to bat for you because you might eat into his cut is exaggerated and anecdotal (not saying this doesn’t happen though). In most cases you’re not given companies directly from your analyst’s coverage. A lot of times it will be a combination of IOCs and companies from an analyst who left/got fired/got promoted to management, etc. Also, don’t discount the ability to switch to a different firm for a promotion.
Going into sell side ER expecting to become an analyst is similar to joining the buyside as a junior and expecting to become a PM - while it’s possible, turnover is low and luck is heavily involved, doesn’t mean the junior position isn’t worth it.
Regarding the sell side as a whole, some commenters in the forum downplay the role unfairly. The overall wallet is shrinking obviously and it’s a headwind, but demand for good research, expert opinion/analysis, differentiated views, management relationships, detailed/polished models, etc...very much still exists. Pretending as if all the big name hedge funds and asset managers who use the sell side (essentially all/most of them to some extent) would get the same value talking to a reporter/Bloomberg intelligence or whatever is laughable and is misinformation for people trying to learn about finance careers.
I want to highlight that I am not trying to downplay industry headwinds, there will be big shifts (already happening to an extent) in the industry due to MIFID, lower commissions, etc...