Where does ER go from here?
Seems like there are more technology solutions and platforms. What will the market look like in 5-10 years?
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I still do, but you have to pick your analyst carefully. Incentives have changed for the worse because of II voting change to commission-weighted (versus prev AUM-weighted, which skews toward trading-oriented clients going fotward), so the bifurcation is stronger than ever between truly insightful analysts and "I called 'my guy' and this quarter is going to be good" previewing quarter kind of analysts. The latter is garbage and is pretty much in run-off IMO when they don't get votes and no one reads their product.
You obviously don't want to work for the latter if you need to have a brain for your exit (ie. going to buy-side, going to VC / corp dev, etc.)
SS ER is still a good mid-way job to the buy-side because you at least get exposed to think about businesses (of course sell side does not think about things in the right way because of short termism and extreme precision-thinking) and develop a sense what drives stock prices.
Most of fresh college grads will still choose IB over ER because connections are stronger to the buy-side, but I don't think you develop as many skills about studying businesses in IB.
Thanks for your insights, it's much appreciated! Seems like much of your support for SS ER is only on the basis of it serving as a stepping stone to BS ER and not in the job itself. So what do you say to someone who's not interested in transitioning to BS and would probably stay in SS if they were to go down the ER route, would you say it's a bad career choice?
My concerns for SS ER are more about choosing it vs other career paths, so looking at the overall view on the future of ER in terms of the quality of work deteriorating and the secular headwinds to the industry commonly mentioned that'll put pressure on comp and job security in coming years.
I think ER is a potentially rewarding career path if you are covering a bankable sector that is a key vertical for your bank's capital markets franchise. Being somebody who does thoughtful research and gets II votes is great, but the analysts who are adding the most value are the ones who are bringing in banking business. I have been associate at a bank with a strong biotech/healthcare franchise and the senior biotech analysts are very well compensated and have relatively good job security. That said, the opportunity to be a senior analyst at a bank in a sector with a coverage area that has consistent deal flow is probably a very small subset of available seats, and opportunities to become a covering analyst at a quality bank are rare enough to begin with.
I spent a few years in sell-side research before transitioning to buy-side. In agreement with others above, a key problem in SS ER is the wide variation in potential experiences.
The problem is: 1) if you’re coming in with an undergrad ‘class,’ you may have limited influence as to where you get placed, and 2) even if you do have say in the matter, I personally did not have the knowledge or resources in university to really know who was a ‘good’ analyst to go to. If you are off-cycle, you will be able to better ‘pick and choose’ what specific role you apply to obviously.
As far as long term career trajectory goes, on the sell-side, you will be working harder for less money (than in prior years). While not all banks have this issue, I felt that the bank I was at was approaching that point where the pay did not make up for the long hours/personal sacrifice. As others have said, senior analyst roles are not easy to obtain and luck is certainly involved.
All this said, there is no doubt that the role still builds a broad skill set in modeling, writing, communication, and general business analysis, as well as still offers strong exit opps if you apply yourself. Also, just because something requires luck does not mean it’s impossible, you just need to position yourself to capitalize on opportunities as they come.
Totally fair question. The problem is that it's hard to generalize this, and the decision would have to be based on the individual situation. Most people will say (correctly) that IB will give the widest range of exit ops, while ER will focus you more on public markets investing. If you know you want to be a public equity investor and have no interest in deals/M&A, I think ER makes more sense because you can obtain a similar exit doing work you enjoy (or is at least relevant to your interests) instead of suffering through an IB stint. Additionally, IB hours would make it very difficult to simultaneously do CFA, if you're interested in long-only (not necessary but helps recruiting).
If you are really undecided on what to do within FO finance, IB is likely the right choice, unless you are deciding between a no-name IB shop and a top BB ER job. I was never in IB so I don't have a perfect view of this, but it seems that the IB route is a bit more risk-averse in that it gives you more options and is a more well-known path, whereas ER can be pretty niche outside of the public equity sphere.
Hope that helps...would be happy to answer anything more specific, but it would be hard without knowing interests/goals/offers at hand...
Good thoughts from many of the responses in here. I'd like to echo a couple items. For reference, I was a ER associate for 3.5 years, CFA lvl 3 Candidate, and recently laid off due to our bank scaling back cash equities exposure.
Positives for ER: Learn essential finance skills (how to model financials in excel, interpret covered company's management skills and how they plan to attack future economic challenges, how to asses competitive advantages of a company (geographically, product competitors, etc) and you will drastically improve your writing and interpersonal skills (writing multiple research reports each day while talking with investors/internal sales). IMO, the best skill you will learn in ER is how to pick long term compounders for your personal portfolio (you won't always get them right but you will be closer than 95% of "investors"). ER gives you the ability to dig in into the fundamentals and see if a company will outlast its competitors over time, can management continuously innovate and grow sales, and how does management positions themselves for long term success. For reference in a balanced portfolio, I'd only invest in 3 of our 25ish company's under coverage for my PA (~15 companies under coverage were zombie companies and the other ~7 were average)
Cons for ER: It's a dying industry. Meaning commissions to the SS continue to decline every year and will likely continue for the foreseeable future. Only the hot sectors (IMO it's tech, healthcare, consumer, etc) will continue to grow each year. Dying sectors (energy, industrials, utilities, etc) will likely see major consolidation in the coming years. In addition, more and more buy-side shops are doing their own research and trading, which has a negative impact on the SS. Buy side jobs will be around for a long time but I'd question the amount of these jobs that are stable for the long term. It's no doubt that ER has been disrupted and is going through a consolidation phase right now.
TLDR: ER is one of the best areas to learn about holistic finance early in your career. The outlook for ER is bad but I would use your experience as a stepping stone. Buy side jobs are dwindling as well and the LT outlook for these roles are hazy. If you want to make a career out of ER (best of luck first of all, it's going to be an uphill battle), you have to be in a high sales growth and banking friendly sectors.
I believe that ER will certainly be alive moving forward; albeit, its growth will remain flat relative to other industries and the amount of analysts will still remain small when compared to IB. Below, I've listed the two most compelling reasons as to why ER will be in strong demand in the future:
1. Critical Role for Investment Banking Division: Regardless of MiFid II's impact on reducing the trading commissions and fees directed to research, ER adds significant value to the IBD. That is, the IBD team relies heavily upon its ER department for company-specific research. Moreover, for IPOs and M&A deals, bankers need large access to relevant industry and company research associated with their deals. This could be anywhere from the client's competitive landscape to the growth assumptions used in its DCF. Yet, it would be feasibly impossible for bankers to perform enough diligent research on these topics in addition to their 80-100 work weeks of compiling presentations, underwriting securities, and working on accretion dilution models related to the deal itself. That all said, an important aspect to note about ER is that although analysts often work with the buyside, a huge part of ER's value add is providing relevant research to the IBD. This can explain how most ER teams are fully in tact even though banks have been trimming S&T groups left and right due to automation. Also, the one example where Nomura cut its ER isn't exactly true since Nomura made a deal with Wolfe Research instead (who will likely now start covering all of Nomura's banking clients and basically act as Nomura's ER branch).
2. Non-Automated Front-Office Role: Aside from supporting IBD, ER's main function is to interact with the buyside (HFs & AMs). Despite what some bankers may believe, sell-side ER is a very client-facing role as you progress from an Associate to an Analyst/MD. Specifically, ER has 3 important purposes for the buyside and hedge funds: (1) provide in-depth company/industry research to HFs which do not have in-house analysts on the specific company (2) serve as a general resource to HFs for the sake of knowledge and second-opinions, and (3) provide more color into management's guidance since one HF will not be able to meet with as many companies as all of Wall Street's ER teams can. That said, typically the better a bank's ER team is, the better the bank's ECM team becomes as well since the institutions who are buying the securities from the IPO know that the ER (and ECM) team will have good industry knowledge on where the company stands in the public markets (good example of strong ER correlating with strong ECM is Cowen, who has done well in the small cap biotech and IT verticals). That said, all of these aspects verify both how ER adds value to the buyside and how difficult it would be replace human beings with AI for these tasks.
Conclusion: Although MiFid II's 'unbundling' may create short-term headwinds with trading commissions and a client's direct fees to research, these concerns will ultimately not bring down ER. However, as a result of lower fees, it is likely that ER will continue to consolidate, especially within the boutique firms that do not have an IBD or ECM platform. This is because these smaller boutique ER firms derive 100% of their revenue from fees associated with providing their research to hedge funds and asset managers, as opposed to the IBs that utilize research more so for deal support than merely just a service for the buyside. Not saying that these boutiques don't add value, just saying that there is no need to have 20 of them. Ultimately, there is a reason why trading commissions have been falling for decades even before MiFid yet ER departments for BB and MM firms have remained. There is also a reason for why pre-MifiD II, investment banks would just throw in their ER as a free perk to clients. It is because ER falls somewhere between a necessary 'cost center' for the IBD and a beneficial sales force for fostering more buyside attention. Everything said, as long as active investing exists (which it certainly will), ER will exist. For anyone thinking about the industry, I would recommend aiming for a BB and MM firm for the time being in order to mitigate the risk of smaller firms consolidating (which I feel could be advice for any industry ever).