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:
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.
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.
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!
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.
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.
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!
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