Q&A: Sell-Side Equity Research today

I’m an MD in equity research with 15+ years experience. I’ve worked at bulge brackets, mid-sized firms and regional firms. Ask any questions on life as a an analyst today vs. several years ago including pre-settlement and bulge bracket vs smaller shop.

 

Bulge bracket was much more siloed and less collaborative. In the US It took some effort to get other analysts covering different sub-sectors of a broader sector to come together and put a joint or group report out. Interestingly, in London and Europe it was the opposite experience and these type of reports were more common and there was a general sense that coming at a theme or topic from different angles was value added to clients. This was some years ago so perhaps its changed a bit but my guess is not much. One advantage to a bulge bracket or even sub bulge but larger firm, is that you have grater internal resources to tap into. For example, I covered US equites and if I needed some insights on European or Asian competitors or markets all I had to do was pick up a phone for shoot out an email. A smaller firm just does not have that depth. Bulge brackets and larger firms also tend to skew larger cap (unless its a banking client) so you are covering companies with a lot of competition from other shops. Smaller firms allow more latitude in coverage and I found covering some small and mid cap names to often be more interesting. Plus, access to C-suite management is much easier that at a larger firm (non bulge as bulge brackets also get pretty good access). Getting a bulge bracket on your resume when just starting out is, in my view, better than not having it. It gives a broader experience at a sometimes higher level. It's harder to go from small to big than big to small (not impossible but harder). On a more general note, I'm not sure I'd advise a person just starting out to go into equity research. The job is vastly different than when I started and probably not as fun. The compliance restrictions are, in some instances, draconian and, in my view, actually do a disservice to investors. But, if one does want to go this route my advice would be (aside from the obvious, get into the best school you can and get very good grades) to network and really dig into what is going on in the markets globally. Write a couple research reports with full models and have someone in the job review it and critique it. Don't wait until you have to interview to start getting good at writing reports, presenting an investment thesis and modeling. Feel free to follow up with additional questions/comments.

 

Larger firms have larger teams, in general. Unless you are a very junior equity analyst (just promoted into the job say) having at least one associate is the minimum. The number of assoictes also depends, in part, on how many companies are covered. A general rule of thump is 1 team member for every 8-12 companies (depending on sector). So an analyst covering 7 companies is probably running solo vs an analyst covering 20 companies certainly has one, and very likely two associates. This could easily be three at larger firms. In my view, we will see a drop in the number of companies covered, particularly small cap and mid cap. Bulge bracket analysts are likely top or near top ranked so by definition one would think their research is valued by the buyside and they have the access to senior management at larger caps and are likely being paid (indirectly) for that large cap coverage. I think we could see sm/mid names dropped by bulge brackets unless they are banking clients. This could be an opportunity for a smaller or mid-size firm to pick up share as the buy side is still going to own these companies so there should still be demand for sm/mid cap sell-side coverage. The next 12 months are going to be very interesting. I'm not sure I would panic but opportunities at larger firms may become more scarce.

 
Best Response

Beyond the obvious, do value added research, client contact is extremely important. This is true for both a new analyst and someone who has been doing it for 20 years. Get out and do as many in person meetings with clients as you can as it helps to have established a face to face rapport when emailing or calling clients. Voice mails are almost worthless as many clients do not even listen to them (there are some exceptions, one client I know actually likes getting voice mails). I don't even log voice mail calls and seldom even leave voice mail anymore as my firm does not count them as client contacts as part of my evaluation. Emails can be effective if specifically targeted to a client and are short. I find an into sentence followed by 3-5 bullets works. I always make sure to invite the client to call or email me if they want to discuss a topic in more detail. When all is said and done clients value information and company access. Quarterly earnings reports are, in my view, just shy of zero value unless you have a very differential view or the results meaningfully alter your view. I used to to do 6-8 page notes (plus the model and disclaimers). Now, 2-3 pages plus the model and disclaimers. Anytime you can connect with a management team clients will value your impression and insights from the meeting or call with management. However, the changes in compliance restrictions have dramatically altered how and what one can say. At my firm if I'm on a non-deal roadshow (NDR) with a company I cannot communicate to a client until I have a written note out. It used to be I would call/email clients between meetings (some clients don't allow the analyst to sit in on the meeting with management, Boston is notorious for this) or at least at the end of the day. That said, as soon as my note is published I am on the phone and sending emails to clients. Clients will also value insights gained from contacts with customers or suppliers or private competitors to the companies you cover. Proprietary surveys you do can also add value.

 

Have a good friend with his series 7, 63, 87, and 87 and passed all the levels of the CFA from a target school working as an ER Associate on a lean 3 person team, supporting a senior analyst. He works at a small third tier international non BB bank and is on the fast track to being an analyst. Problem is he is getting paid at a 40-50% discount to what others on the street are paying. If he could transfer to a second tier BB with higher pay without the fast track to being an analyst, is it worth it?

We're not lawyers. We're investment bankers. We didn't go to Harvard. We Went to Wharton!
 

I guess it depends on career goals. If he is planning on going back to get an MBA in a year or two jumping to a BB might be a plus. From what you wrote it sounds like this is not the case, however. I would assume getting promoted to an analyst would entail a pay raise plus the opportunity to get his own coverage and name at the top of a report. Over time the pay differential should narrow but its very unlikely to hit parity with BB pay. I have also seen many instances of an ER at a BB getting picked off by a non BB to start as analyst. One thing to consider is where he would be in the hierarchy at the BB. Are there 1-2 ER ahead of him or is it just him? If it's just him it might offer a better long-term opportunity. He also should consider what happens if the senior analyst at the BB leaves (either by choice or not). If it's just him and the senior leaves voluntarily to join another firm there is a good change the ER associate goes with him. If he leaves because the firm shoots him it's less clear. If he's any good he can probably join another team at the firm. It's a difficult question to answer. Is he getting paid so much less because his firm just pays a lot less? How fast is the fast track at the current firm? Having a BB on the resume is probably a plus but there has to be some line of sight to moving beyond an ER associate.

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