Does sell-side make sense anymore? What should current sell-siders do instead?
I understand this is a bit of a tired question but I'm feeling nihilistic so here we go.
Over the past year or so, there has been increasing press (especially from the FT) around the use of sell-side as a market function, the value of LT career on the sell-side etc. This was spurred by at first the generative AI boom (Chat-GPT) and then the potential reform of MifiD II. At the moment I'm a sell-side junior. I'm doing fine, I'm at a very good firm. But occasionally I find myself reading the articles and feeling demotivated. While a lot of these articles are just self-serving opinion pieces, they do raise an important question: is sell-side research even worth going into as a career anymore? And if so, for how long?
We work similar hours to S&T guys who often make more than us. Not to mention those on the opposite side of the street. In the minds of many buysiders, we're borderline event planners and conduits for management. The compensation pool does not seem to have any significant tailwinds, only headwinds. The job pool only seems to shrink further as consolidation occurs (e.g. CS equity research is obviously not going to exist soon). I'm willing to be corrected here, of course.
On exits: The platform funds really suit only certain types of people. Long-onlys may soon start using AI to replace juniors. IR - I don't know much about admittedly.
So my question is:
In your opinion, does sell side research make sense anymore?
And if you were in sell-side currently, what would be your game plan or exit plan?
Pump / Following
Structurally speaking, sellside (at least at top shops) will always be around as long as there are publicly traded companies (with human management teams) that engage in frequent capital raises/banking deals and some kind of active investor base.
I'd say the biggest value-add of sellside is being an external consultant to investors. This mainly means corporate access, sector education to generalists, and doing any of the buyside's outsourced grunt work. But at the end of the day, it's a relationship business, not a returns business.
Sure, the industry is not "growing" but neither is buyside. In fact, I'd say from a value-add perspective, public buyside appears to be in incrementally more trouble than sellside. With capital flowing to passive at a rapid clip and 90% of active funds trailing benchmarks, fee pressure could very well eliminate many LO roles like you mentioned. HFs will likely be around longer given their market neutral value add, but that doesn't mean you will (unless you're top decile on the distribution curve). Given this I’d almost say sellside is sort of a casino for buyside - you're the dealer and let them play their stock market game and will always get paid as long as enough come back. They don’t have to be growing, but just sizable enough.
So when you compare sellside w buyside, I only see incrementally less career risks within the domain of public markets. This might come with the trade off of being a glorified liaison / sector teacher, but the value add from alternative buyside seats only seem more challenged (holding top PM at HF aside).
I think a better question to ask is if it's even worth it to go into public markets at all before worrying about sellside specifically.
Agree with everything you've said. Including the final question which is really where my post was heading and maybe I should've made that clearer.
To me I look at public market roles/industry and it feels like we're in the shakeout/maturity stage of the cycle. My point was never that it was dead but if I think about a career here for 20 years, does it make sense to still invest time honing this craft? Or am I better compounding another skillset, closer or further away.
It's a really simple question: how passionate are you about it?
Public markets are no different than private markets in terms of value-add/skill, so perhaps an even bigger question could be "why even do finance?"
Evidence continues to show (regardless of asset class / investment style) that the majority of humans are unable to consistently beat an appropriate risk-adjusted benchmark across a relevant time period.
So the cold hard truth is active buyside doesn't add value net of fees (holding some outliers on the distribution curve aside), and most of the “perceived” value add is either offering a defined exposure to an asset class or good marketing. Though PE can hide behind return smoothing and quarterly mark-ups, there is no return difference between a leveraged buyout fund and a concentrated portfolio of small cap value stocks.
So in the grand scheme of things, you're either a fake-value-add investor delivering a beta-like product or you're a sellside serviceman helping them out. In both cases, you collect a pretty big paycheck compared with the rest of society, but ironically you add minimal value. Sellside comp perhaps a bit lower ceiling than top decile buyside but median likely the same with less career risk (since you're the casino, not the gambler).
Of course there was a time in the past where there was less scrutiny on actively managed fund performance (especially before the rollout of ETFs) where you could just hug a benchmark and charge something close to 2-20 and make bank- but those days are long gone. Today, we’re likely seeing the first stage if maturity/scrutiny with PE as too much capital enters the space (in combination with higher interest rates).
I know this is a bit dark, but it's a fundamental truth I've realized in this industry. I think if you're interested in the line of work, like truly interested, it makes sense. But you're definitely not signing up to be "adding true value" like you might naively think.
Josh Schimmer just got $42 million over 5 years.
Don’t think it’s dead.
Sure there are people like him but I'm not in biotech and probably never will be. And neither are most sell siders. I also don't think anyone can argue he's not a 0.1%er here. If you take the 0.1%er from any industry, you'll probably end up with a pretty rosy picture. What I'd like to think about is what about for not even the average person but a 10%er (that's still top ranked in most sectors with 10-20 analysts). What will the future be like for those people vs outside of sell side?
Can you confirm this? I have heard it is $5M/year guaranteed 3 years.
Lots of things you can do.
Move to the Buyside/IB/IR/Business School
Buyside / IR / Business School / Investment Banking / Equity Sales / Corporate Finance / CFO of a covered company
Point is there are a lot of options if this isn’t what you want to do.
Came from the S&T side into buyside but ended up staying as an analyst. Yes, S&T makes more but have to consider they're taking on risk and it is not uncommon for banks to screw even seniors come bonus time, not a total meritocracy.
Honestly, if you like the research portion of your job but don't like the client aspect, something important as you get more senior, maybe try finding a role at a firm that'll allow you to do research without sacrificing so much of your time for dealing with clients.
Sales does as well? Or just trading?
From what I've seen, sales is worse purely in terms of comp relative to trading at the *junior* level. As you rise higher, the gap closes significantly. It's cliche but if you get the opportunity to pick, do it based on what you think you'll do better at.
However, big problem with sales is that due to the nature of the biz, it's typically seniors holding all the cards with little incentive to let the younger guys to play. Of course, not every trader is great mentor.
Not sure what “makes sense”means but yes equity research will continue to exist. The best place to be is advisory (coverage or lev fin) or transaction roles like DCM, and I guess ECM but it doesn’t do as many deals.
Doesnt seem like you quite get it judging by your use of FT as a non-contrarian news source. But at the junior level on SS, you get out what you put in.
If you dont like how much is just reiterating what mgmt, punching guidance into models, or putting together conferences, come up with ideas for senior analyst. The reason SS exists is to provide any incremental data that will help buyside.. Maybe you scrape gov website for shipping data related to your indsutry, talk to someone in credit and learn how to analyze a debt stack, learn some technical component to your industry to understand diff product specs. Just do something to continue developing your skillset. This either a) prepares you better for exit opps or b) makes you a more knowledgeable senior analyst eventually.
Yeah AI can update a model and write a note summarizing earnings call, but thats only part of senior analysts jobs. Senior analyst job is to provide incremental data points for buyside, sometimes thats in form of arranging meetings btwn buyside and mgmt, but it can also come in form of creating and publishing a database, knowing how to read the tea leaves of industry, etc. At junior level, your job is to learn about the industry and buyside in order to learn how to do this. Imo there are v few other jobs where 75% of your job is to learn.
I been on SS ~1yr, exit plan is to leave for LO within next 2. I have tried to make modeling/earnings reports as automated as possible to make time for actual research and industry knowledge. Understanding different verticals of companies we dont cover, made database of different assets in industry (not easy). At very least, those are more bullet points on the resume, or ideally, boss is impressed come bonus szn
I like your thought process, could you shoot me a PM?
This is an interesting perspective. It's not something I entirely didn't know but not something I'd fully put together either.
One issue I have is that the BS takes up a lot of my time right now. I'd love to do this extra work you're talking about but for reasons of either 1. Inefficiency 2. External factors outside of my control, the BS has been consuming most of my time. I'm not in a particularly easy sector either from an understanding POV and despite my tenure, I'm still getting to grips with some of it.
This isn't the first time I've heard about providing incremental datapoints etc. actually. Someone told me this when I started and I've actually been quite successful at doing this stuff in previous internships but as I said, I'm not in an easy sector. And part of that is because data (especially in Europe) is extremely limited from what I've been able to find, even thinking outside the box. I understand the drivers of the sector but most data sets are either 1. Extremely public (no value add) 2. Very black-boxy I.e. unknowable to an outsider 3. Incredibly time intensive to curate due to the lack of structure. The last is what I've done work on but I only have so much time to be doing significant data entry. Maybe I need to think more outside the box...
Maybe it's my sector that has me disillusioned? Idk.
Anyway, how are you automating modelling or earnings reports? Frankly those don't take a lot of time for me right now but would still be good to know.
Regardless thank you for your contribution. Good luck in LO.
Understandable. I did w mix of Python/VBA. Python to html scrape and manipulate dataframes. VBA more on excel side and partial note writing side. I do more manual stuff when it comes to adjusting earning forecast/extra color on notes. But one thing that helped me a bunch w/ the qualitative stuff was fintwit/substack. Just searching for tickers on twitter when company reports earnings/news helps a bunch to see buysiders w experience how they interpret news and the second order thinking for sector as a whole when incremental data comes out. Really helped me to develop how I think about sector and think quicker about sector implications at higher level
The most successful sell-side that I've seen spend a lot of time networking and are strong communicators, building themselves up as a recognized authority on their industry, and eventually being a speaker themselves at conferences, business news, and so on. This means doing a lot of non-investing stuff, which may not appeal to all personality types, and for the typical buy-side analyst, who have poor communication skills, they would have to spend a lot of time working on that. I think the industry will continue to re-invent itself, because active buy-side has lost market share to passive funds relelentless for... decades, by now. The trend is making a clear statement - it is not value-addative for most research efforts to be replicated internally at funds, which is something sell-side can scale to a lot of funds.
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