Q&A: Equity Research Associate at a Boutique Firm

Hi WSO, I want to give back to WSO after using this website and many other resources to move from PubFin to Equity Research. Feel free to ask me questions and I will get back to them as soon as I can. I am by no means an expert (less than 1 year in ER) but I can add my insight into the industry and give advice to WSOers trying to break into the industry.

 

I will not speak specifically to my firm, but rather more generally about my opinion of industry. The BBs with a lot of II ranked analysts will continue to have business regardless of MIFID II (based ability to pull from many different resources - the IB branch, other analysts within the bank, etc.). I believe the II ranked analysts at MM (or smaller) banks will either move to a BB or go to an independent shop that has deep industry connects and detailed research (e.g. Wolfe). Therefore, there will definitely be a consolidation of research departments at MM (and smaller) banks as they have less resources within the bank and do not offer too much of a differentiated product/service compared to a BB. At the smaller independent shops, clients pay for 1. deeper and differentiated research; 2. strong modeling (rarely the case) and/or 3. strong industry connects (usually the reason). Analysts at small shops with access to management and the supply chain (AKA strong industry connects) will always have demand (the buy-side can model and develop standard research reports).

"The ceiling is the roof"
 
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Those are a lot of questions, but I'll take a stab at it.

It will be challenging to move from munis to equity research. Most ER candidates have a background in finance/accounting in the coverage industry for which they are applying or have prior experience in ER. For that reason, you will have to have superior technical skills and a good "story." Have a story that proves you understand the industry and would kill to break into it. Also, you need well-thought-out responses to behavioral questions (e.g. why are you moving from munis to ER?).

To strengthen my technical skills, I completed a self-study financial modeling course (e.g. BIWS), practiced modeling companies of my interest and signed up for the CFA. In equity research, modeling is typically only about ~10-15% of the job (depends on your analyst), but it is a great skill to have and will significant help you on interviews. As I said earlier, since your background is in munis you will have to be especially strong on the technical side. There are no shortcuts mastering technicals and simply watching YouTube videos or reading a few articles will not suffice. Investing in a course was the best decision I made. Also, I am now a CFA Level II Candidate, so I would be happy any questions relating to study prep. Warning: completing the modeling course and taking the CFA Level I is a huge commitment so be prepared to have no weekends and limited sleep. If it were easy, everyone would do it.

For networking, I cold-called and e-mailed associates and analysts non-stop. I made it a priority to email 5-10 people in the industry per day. Keep it short and simple. No one (especially in ER or IB) has time to read about your life-story (and nobody cares). Ask for a 15 minute call or a quick cup of coffee. The smaller the commitment, the better.

Persistence is key... it took me 9 months to break into the industry and I would consider myself fairly lucky. If you really want it, you will find a way.

I wanted to work in ER because the fast-paced learning environment, the skill set you develop as an associate, the excitement of public markets and following multinational corporations and the exit ops (e.g. buy-side or corporate development). Also, I would be more than happy with a long-term career in sell-side ER (unlike IB in which case I would be three years and out).

"The ceiling is the roof"
 

Thanks for doing this, I'm actually interviewing for an ER (sell side) role next week - stage 2, the dreaded modelling and writing exam.

This is my first step into the ER world and have limited modelling experience, so I'm most concerned about this element. Is there anything specific you would suggest or recommend to prepare for this test?

I've been brushing up on basic modelling via youtube and other sources and will go through some analyst reports to get a feel for what main points to hit in reports, but I'm a little unsure as to how I should structure the writeup/recommendation and what exactly I should focus on to improve my modelling. Any help would be greatly appreciated!

Thanks dude

 

See my comment above - invest in a modeling course. To be frank, YouTube and reading a few reports will not be enough to grasp a strong understanding of modeling. It is certainly not rocket science, but I think it takes a bit of effort and practice. Hopefully the exam will not be too difficult and just require basic excel. For the writing portion, do not worry about the recommendation. Be clear and to the point, create an argument and demonstrate your understanding of finance (but stay within your means... don't be talking about capital structure or the cash conversion cycle if you do not fully understand those concepts). Most importantly, PROOFREAD. Spelling and grammar mistakes happen, we are human. However, do your best to keep them to a minimum. Best of luck!

"The ceiling is the roof"
 

First off, congrats on the transition. With enough ambition, you should not have a problem moving to ER. Second, I can't fairly answer that question because I have only used BIWS. I can say however that BIWS was easy to understand, comprehensive and fairly cheap. It covers everything from simple accounting to merger and LBO modeling. I would highly recommend it to anyone interested in breaking into "high-level" finance (IB, ER, etc.). I am sure the WSP courses are awesome as well and friends have spoken highly of them, but I have never personally used them.

"The ceiling is the roof"
 

Thanks for taking the time to do this. I know this is widely discussed, but what would you consider to be the best CFA Level 1 study materials? Also, the FP&A role I'm moving to next week is in healthcare technology. When I eventually decide to pursue ER, is it logical to only pursue associate opportunities in that industry, or would you consider it to be pretty fluid at the associate-level, depending on the firm?

 

Given the time constraints, it will most likely be updating a model with reported results. This requires a basic understanding of the three financial statements. For practice, create a model using the last reported four quarters of an industrial company of your choosing. Do not go overboard and use the proper equations to make sure everything links (do not just hardcode everything). For writing, keep it brief, summarize the key points and stay within your comfort zone. Try to get your hands on an earnings review and be familiar with the format and style of writing.

"The ceiling is the roof"
 

Hi - currently in S+T and interviewing for ER covering TMT. I'm at the 2nd round of interviews where I will have 2-3 hours of modeling/writing. I passed CFA L1 and completed the WSP Courses. My concern is that I don't do this on a daily basis so concerned about the detail that I will be required to deal with in the modeling test. I have access to sellside reports/models for specific TMT companies/industy and specifically this firms reports. How did you deal with the transition and interview process? What would be your recommendation?

 

Do not be concerned... you were chosen for the interview with your current experience and you are not expected to know intricacies of the industry. With access to the reports and models, you should be well equipped to handle the interview. Make sure to delve deeper into metrics and words that are not familiar. Also, do not hesitate to ask questions to your interviewers. I focused on mastering the basics knowing the transition is never easy and most advanced skills are learned and polished during the first few months on the job.

"The ceiling is the roof"
 

In my coverage group, equity research analysts typically use comparable company analysis for valuation purposes. NPV/DCF is more applicable to investment banking or other industries. With that being said, I would use WACC to determine a base discount rate and use +/- 1% in a sensitivity analysis to solve for the output (i.e. if the base rate is 9%, I would also use 8% and 10% in the sensitivity analysis).

"The ceiling is the roof"
 

Hi CeilingAvenue,

I hope you're still willing to answer some questions. I'm also at a boutique doing ER as an associate (MM/BB(if possible) doing either ER or ECM (just something I've considered). I've heard that being at a boutique like we are doesn't put us at much of a disadvantage, but are their clear advantages of trying to move to a MM or BB other than prestige/ brand recognition?

Also if you did move where would it be and for what reasons?

Thanks.

 

Great questions, I ponder these on a daily basis.

I hesitate to pursuit ECM given its exit opps are similar to sell-side ER. In my opinion, both provide the potential to exit to investor relations, buy-side ER, IBD and Corp Dev. Therefore, if you are happy with your current role, there is no reason to switch to ECM if you plan on exiting in the short- to medium-term. However, if you are going to stay in ECM or ER long-term, I would choose ECM as I believe it has more upside than sell-side ER due to more consistent promotions, better overall pay and less regulatory concerns (MIFID II).

As for moving to a more prestigious MMs or BBs within sell-side ER, I view it as a positive. It definitely depends on the situation (e.g. if your analyst II-ranked, then stick it out for a few years), but for the most part, I believe having JPM/MS/BoAML on your resume just looks better than a boutique, especially if you plan to exit to a company (IR/Corp Dev) or sector (IBD/buy-side) outside of your current coverage. MMs and BBs also tend to have better upward mobility if you eventually want your own coverage.

"The ceiling is the roof"
 

I'll add an example situation. Person A is an associate for a well respected analyst in his/her industry, but their firm lacks upward mobility. Therefore, Person A should plan to upgrade to BB ER. If the transition takes too long, Person A should be more open to BB ECM given it is likely BB ECM > Person A's current role in terms of career advancement and exit opps. If Person A is unsure of their desired long-term career path (changes on a weekly basis), then Person A should put focus on being in the best position for both up and out. If Person A is dead set on either ER or ECM, then obviously they should pursuit BB ER or ECM, respectively.

"The ceiling is the roof"
 

Do you think it's possible to break into ER from FP&A? Currently in an FP&A role for a F500 company (CPG) after graduating from a non-target this spring. While in undergrad I was a analyst in my schools investment fund and have experience with writing research and modeling. I also plan on taking the CFA level 1 next June. Is there a recommended amount of time I stay in my current role before pursuing ER? Thank you.

 

Absolutely. Study for the CFA, create an operating model (IS, BS, CFS) and write an ER-styled note (this is helpful - https://www.mergersandinquisitions.com/equity-research-report/).

Have 5-15 people proofread and review your resume, model and writing sample. Then, search for some job openings, find the lead analyst and email him/her directly with your resume, model and writing sample.

If you are 100% certain on ER, then do it now... waiting is overrated. However, be prepared to be patient as the transition is not easy and does not happen overnight.

"The ceiling is the roof"
 

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