AlphaBanker recently interviewed a sell-side analyst. There is still a Chinese wall between people working in the same trading floor. So if you wonder what a sell-side analyst really does, here are the answers:
A: That’s a really important question. For the past seven months now I have been working for a highly ranked analyst doing equity research in the consumer sector. A lot of people don’t understand why high level analysts stay on the sell-side, and I think that’s because unless you’re working as an analyst in investment or asset management, most people don’t understand how equity research works or why it’s valuable.
Q: So what does equity research entail look like from a investment and/or asset management standpoint ?
A: You have to understand that equity research is often just a way for an analyst to stay visible, and the content isn’t necessarily innovative. But just because the bulk of equity research isn’t exactly groundbreaking doesn’t mean it’s useless. Equity research provides a benefit for the buy-side by making their jobs easier. My team is on the sell-side. It’s our job to perform the task of analysis that buy-side researchers will often skip over, but if done properly the buy-side will find it valuable too. What happens is that a lot of buy-side analysts will incorporate the models created by the sell-side rather than starting from scratch, saving them hours of work. Because of that, they appreciate us, even if ultimately the data contained within isn’t remarkably informative.
Now, I don’t want to set unrealistic expectations of analysts who work on the sell-side. I would say maybe ten percent are talented researchers, and highly regarded by the buy-side. For example, recently one of our biggest competitors published a detailed, organized and creative pitch proposing that one of our companies should break up or go through significant restructuring. This publication resulted in a lot of attention and respect for the author.
Q:So if analysts aren’t contributing a whole lot to the industry, why are there so many of them?
A:The simple answer is corporate access. For instance, I work with a low ranking analyst, and the only reports he releases besides the earnings review are occasional publications lacking original content. But he’s there because of corporate access. He’s responsible for about twenty companies and knows the management team of many of those companies very well, so he can easily set up non-deal road shows. Clients love him because of his added value.
The lesson here is that being an equity research analyst isn’t just about creating good reports. Analysts rely on content and marketing to build up their research franchise. Only a few analysts are really good at content. The rest make up for unimpressive content with strengths in marketing. But if someone is weak in both, you can be sure they won’t be around for long.
Q: How does an analyst working on the sell-side move to the buy-side?
This is another one of those topics that everyone outside of the industry thinks they understand but really don’t. It is true that a great number of people transition from the sell-side to the buy-side. Analysts with experience on the sell-side are given preference over bankers at average funds because their research background affords them a greater understanding of how the markets function and what causes stock to move.
But actually most people who go from the sell-side to the buy-side are associates, not analysts. Associates can either become an analyst in their own sector, transition to another career like finance or investor relations, or they can move to the buy-side. I would say a good two thirds go to the buy-side, skipping becoming an analyst first. This might be because they don’t feel they have the necessary skills to become a successful equity research analyst, or they enjoy analysis over marketing and desire a purely analytical role. Others are recruited by the buy-side directly.
Sell-side analysts are actually less likely to go over to the buy-side because they don’t like the more stressful lifestyle or because they’re better at marketing than at identifying promising stock. Working as analyst usually requires 30 hours per week, and analysts can work from home and see more of their families. Sell-side analysts make enough money to live a comfortable life. They’ll earn a lot more money on the buy-side, sure, but they’ll work longer hours at the office, and the stress is intense, causing irregular sleep patterns because they want to check the global stock. Top analysts see this and decide to keep their positions on the sell-side.