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Life on the Sell Side: Recruiting, Compensation and Exit Opportunities (Hello, Buy Side)

Pie Chart and GlassesBy now you know all about equity research, but you are probably clamoring for the real juicy bits like recruiting, compensation, and exit opportunities.

That’s why I saved the best for last. Part 2 (Part 1) of Life on the Sell Side  tackles all of those topics and more (as always, we have to touch on MBAs and CFAs) from an experienced sell side equity analyst.

By the end of the interview, you should have a good understanding of what it takes to break in to the equity research business, understand how you’ll advanceon the job and, of course, learn what exit opportunities are available to a sell side equity analyst.

All right, no more intro… Part 2 of Life on the Sell Side begins now.

Q: What types of people break into the equity research business? Are they looking for undergrads, MBAs, CFAs...?

The people who do best in this industry are good at multitasking. Equity analysts must be capable of both quick and detailed financial analysis. They also need to be able to explain their conclusions succinctly both in writing and verbally.

As far as technical skills go, being an expert in Excel (and Access) will help you as an Associate.

MBAs can do well in the space, but in my opinion, getting in right out of undergrad from a top tier university with a degree in finance or economics and then getting a CFA on the job will give you the best bang for your buck on the sell side.

Q: How does the recruiting process work for undergrads?

On Wall Street, many Associates are brought in through a summer internship program. At my company, they do a rotational program between research, sales and trading, and then get placed permanently after that depending on needs and your abilities.

Getting an internship should be your top priority as it is your best chance to break into the business.

People with some experience are sometimes brought in as well. But, as with any job, networking and personal connections are keys to landing the job through that path.

Q: What can candidates expect from interviews?

Expect to discuss your background and interests and how that makes you a great candidate to be successful at the job requirements. Talk about the sector you'll be working in, and your expectations for drivers that are influencing stock valuations. You’ll need to demonstrate a basic understanding of finance, but you probably won’t face anything too technical.

Expect to talk about your commitment to success, and your ability to make conclusions and express them fairly, but also with conviction and clarity both written and verbally.

Q: How much financial modeling or accounting do candidates need to know for interviews?

Depending on the sector you're working in, there could be more or less complex financial modeling requirements. A good finance, economics, and accounting background will always be helpful.

Basically, the more data that is available on the economic drivers that influence your sector, the more potential there is to add value through financial modeling. The more value that can be added means the more important your ability to read financial statements will be to your employer.

On one end of the spectrum, real estate has a lot of data and is more model-intense. On the other end of the spectrum, intellectual capital companies have less modeling, especially ones without earnings.

Q: What is the hierarchy of equity analysts? Where do you start and how do you advance.

You start at the Associate level, this is where you learn about the 10-20+ companies your team (usually you and your boss) are responsible for by updating the earnings models and industry models (primarily Excel and Access-Based), summarizing any news you can find that could affect the valuation of your companies, and writing research notes on company news and earnings.

As you become better at this, your manager will start bringing you into conversations with clients, allowing you to speak with them and start building your own reputation. After a few years, you will probably get promoted to Analyst.

This promotion could come sooner or later depending on how fast you become knowledgeable about the companies, proficient at discussing the state and outlook for the industry, and your ability to communicate your ideas effectively through written research, presentations, and on the phone.

Analysts are responsible for their own set of companies, anywhere from 10 to 20 or more, and usually have an Associate to help them. The most effective Analysts have great relationships with clients and company management teams and other outside industry experts who they can call on to discuss upcoming changes in the industry that could affect the stock prices of the companies covered.

Once the Analyst role is reached, the job is really about becoming more valuable to your clients by serving them better through your expertise and growing the overall number of clients to bring in more and more trading dollars.

The more trading dollars you bring in the faster your salary and bonus will go up, and your title will go to Senior Analyst and then to Managing Director and then it pretty much peaks out there unless you want to move into a more administrative role such as Director of Research.

Q: Tell me a bit about equity research compensation. How does it compare to other jobs, how are bonuses structured, etc.

Your earnings potential is higher at a bulge bracket firm, where your bonus will likely be 50%+ of your salary. The higher up you go, the greater percentage of your total compensation comes in the form of a bonus.

In my experience, at a boutique firm, your overall comp will be lower, primarily through a lower bonus. In both situations, bonuses are usually driven by a combination of firm, group, and individual performance.

Q: What are the work environments and cultures like at sell side firms?

This can be variable. At some companies the sales teams have the most pull and other companies place more value on their research teams. Trading ultimately drives the dollars, so your trader and your sales people will always be your most important clients because they can get the word out quickly and bring in revenues.

That said, for the new Associate, the most important person is your boss. When you are part of a bigger research department, your boss (the Analyst) will be directing your work focus, so it is important that you feel comfortable with this person.

In general, it's a fast paced environment with long hours but generally good compensation.

Q: What about exit opportunities? What's next for you or other equity analysts?

That's a good question. Associates generally either move up to Analyst after a few years or find jobs on the buy side in their sector. The sell side analyst is much more of a sales and relationship oriented job than the buy side, though. So, if analysis is more your style, you should look for the buy side exit by networking with your buy side clients.

Other exit opportunities include working for one of the companies that you cover, often in an investor relations role (or an investor relations firm), or working at a firm that provides specialized research/data to the sector you work in.

Q: Equity research from the basics to exit opportunities – that covers just about everything. Thanks a lot for your insight.

Glad I could help.

{ 2 comments… add one }
  • PostDocMike

    You talk about coming from undergrad vs. MBA/CFA, but do you know anything about breaking into the biotech/pharma sector coming from a science background? I have a PhD in Pharmacology and several years post-PhD research experience, but want to move to ER.

    I’ve followed the markets and invested personally since undergrad and find ER to be the perfect intersection of what I love about science research and my passion for investing. Not only does my previous experience provide expertise in doing due diligence and investigative research, but I have also recently taken online courses in accounting, modeling, and valuation methods.

    I am currently preparing my own model and initiation report to shop around to analysts to demonstrate how much I want to make this move and that they should take a chance on me. Going back to school again or waiting to take the CFA at the end of the year are not really palatable options; is there anything else somebody in my position could do to improve their market value to generate hiring interest? Thanks for any input you can provide!

    • I don’t know the gritty details about that sector, but I have had to read a number of sell side reports on biotech stocks over the years written by PhDs that have made my simple finance brain hurt. So the path is definitely out there.

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