Wall Street Prep

Investment Banking vs Equity Research

Comparing compensation, quality of work, lifestyle and exit opportunities

So what is equity research all about?

If you’re considering a career in investment banking, you should definitely consider banking’s slightly less glamorous cousin, equity research.

Equity research analysts closely analyze small groups of stocks in order to provide insightful investment ideas and recommendations to the firm’s salesforce and traders, directly to institutional investors and (increasingly) to the general investing public. They communicate formally via research reports that place “Buy,” “Sell,” or “Hold” ratings on the companies they cover.

Since equity research analysts generally focus on a small group of stocks (5-15) within particular industries or geographic regions, they become experts in the specific companies and industry or “coverage universe” that they analyze.

Analysts need to know everything about their coverage universe in order to make investment recommendations. As such, analysts constantly communicate with the management teams of their companies under coverage and maintain comprehensive financial models about these companies. They quickly digest and respond to new information that hits the tape. New developments and ideas are communicated to the investment bank’s sales force, traders, directly to institutional clients, and directly to the general investment public over the phone, and directly to the trading floor via an intercom system or over the phone.

Am I a good fit for equity research?

If you enjoy writing, financial analysis and getting home at a reasonable(ish) hour, equity research might be for you.

If you enjoy writing, getting involved with clients and management teams, building financial models and conducting financial analysis all while getting home at a reasonable hour (9pm vs. 2am), equity research might be for you.

Research associates (that would be your title coming in as an undergrad) go through similar training to that of sales and trading analysts. After 2-3 months of corporate finance, accounting and capital markets training, research associates are assigned to a group led by a senior analyst. The group is made up of zero to three other junior associates. The group starts off covering a group of stocks (usually 5-15) within a specific industry or region.

Equity research compensation

Investment banking bonuses range from 10-50% higher than equity research bonuses at the entry level.

At larger investment banks, both IB analysts and ER associates start with the same base compensation. However, investment banking bonuses range from 10-50% higher than equity research bonuses at the entry level. The difference at some firms is even more acute. There are rumors that equity research bonuses at Credit Suisse were 0-5k this year. Additionally, IB becomes more lucrative at senior levels.

The compensation difference is rooted in the economics of an investment bank vs. that of an equity research firm. Unlike investment banking, equity research doesn’t directly generate revenue. Equity research departments are a cost center that support sales and trading activities.

In addition, despite a regulatory separation between equity research and investment banking (“Chinese Wall”), it also serves as a way to maintain a relationship with corporations — the very clients that use the investment bank to help raise capital, acquire companies, etc. Nonetheless, research’s indirect role in the generation of revenue makes compensation generally lower.

Edge: Investment Banking

Equity research lifestyle

Research associates arrive to the office at 7am and leave sometime between 7-9pm. Working on weekends is limited to special situations like an initiation report. This schedule is very favorable compared to investment banking hours. Analysts can work up to 100 hours per week.

Edge: Equity Research

Equity research quality of work

Investment banking analysts spend a large portion of their time on monotonous formatting and presentation work.

If they’re fortunate, investment banking analysts are exposed to non-public situations such as IPOs and M&A deals from the beginning to the end of the process. This provides real insight as to how a transaction is done from start to finish as well as how deals are actually negotiated. In reality, however, for the first several years, the analyst’s role is somewhat limited. They spend a large portion of their time doing monotonous formatting and presentation work. The most interesting and rewarding work is financial modeling.

Equity research associates find themselves almost immediately interacting with portfolio managers and hedge fund managers, the firm’s internal sales force and traders, and communicating the senior analyst’s investment thesis after a company reports earnings. In addition, they develop modeling skills by constantly updating and analyzing their companies’ operating forecasts.

Another equity research benefit is that grunt work is limited to the creation of research notes and the updating of senior analysts’ marketing material. However, unlike investment banking analysts, research associates are usually not exposed to the M&A, LBO, or IPO process from start to finish, as they are only privy to public information. As a result, they don’t spend nearly as much time building those types of financial models. The modeling focus is primarily on the operating model.

Edge: Equity Research

Equity research exit opportunities

Equity research associates usually aspire to switch over to the “buy side,”  i.e., to work for the portfolio managers and hedge fund managers that sell-side researchers disseminate reports and ideas to. The buy side offers the allure of an even better lifestyle, and an opportunity to actually invest (to put your money where your mouth is).

That said, the buy side is extremely competitive, even for research associates. Many associates must enhance their profile by obtaining a CFA charter and/or hitting business school before moving on up into the buy side.

Investment banking analysts typically pursue MBAs, start their own business or try to move directly into private equity after their analyst stints. Generally, equity research is looked at as favorably as investment banking for certain buy-side firms, whereas transaction-focused firms like private equity and VC firms generally prefer investment bankers. MBA programs generally look at investment banking and equity research equivalently, if perhaps a slight edge for investment banking.

Edge: Investment Banking

Scorecard

  • Compensation: Investment Banking
  • Lifestyle: Equity Research
  • Quality of Work: Equity Research
  • Exit Opportunities: Investment Banking

Conclusion

While equity research is less glamorous than investment banking, it deserves a close look.

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12 Comments
  1. January 12, 2016

    Vishwa

    Hi there,

    I had an extremely basic question – isn’t equity research a part of investment banking? As such, when we compare ‘IB’ to ER here, are we just comparing a part of the whole to the whole?

    What constitutes IB (as in what kind of jobs are we comparing ER to here?).
    I am still in university and just doing research on all the different paths available for IB careers, and so understanding these differences is key for me.

    Thanks! 🙂

    • January 12, 2016
      user headshot

      Haseeb Chowdhry

      Investment bankers are the professionals working with companies to execute corporate transactions (equity / debt raises, mergers and restructurings).

      Equity research analysts write reports and value companies on a periodic basis – they cover specific sectors.

  2. November 3, 2015

    Keshav

    Hi
    I am in my 3rd sem of PGDM and want to become an IB but before getting into IB want to do CFA .

    Should I wait till the the completion of CFA or should start with any firm.

    • November 3, 2015
      user headshot

      Haseeb Chowdhry

      I would get started on applying to jobs – experience is immensely valuable…

  3. September 8, 2015

    Ronak shah

    Hi

    I was just reading the above article and right now I have hard time deciding which one to go for
    I am from a finance background with CFA level 2 candidate, a 2 year degree at Bombay stock exchange covering global financial markets, b.com grad and currently working for one of the big consulting firms as a risk consultant and also with financial modelling skills

    With this
    If you ask me I like both M&A transactions and equity research
    It’s a hard decision to make as to which side to choose
    Also I would like to get an idea of the pay package that I should be expecting as my work ex is around 1.3 years
    Pls help me out with this and what will be ideal as I have opportunities from both the sides
    Thank you

    • September 10, 2015
      user headshot

      Haseeb Chowdhry

      M&A/banking is more lucrative than equity research, and it’s really more a question of what you find more interesting; doing deals or researching on company performance, industries, and being a liaison for capital markets activity on the sell side. There are benefits/costs to both; as an M&A banker you will have to work more hours and will have less control of your schedule initially, as a research associate, it’s the same story, but in absolute terms you will work considerably less hours.

  4. May 29, 2015

    Abhijeet

    I am an MBA student and confused between selection of Equity Research And IB profile.

    So I had few questions,

    Is the working hours in IB will be same throughout the career, or it will come down with the experience as at some point of time excessive working hour will create problem in personal life.

    What is the profile of Financial Analyst offered by IT companies, Can I switch to ER or IB profile after working for 1-2 year in that profile ?

    Is there any specific preparation needed and any area I should focus ?

    How to get into ER or IB profile at entry level, as I really have no contacts in this industry

    • June 8, 2015
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      Haseeb Chowdhry

      Abhijeet –

      Banking hours decrease over time (>5 years), but they will continue to be intense from your analyst to associate career.

      IT companies are looking with primarily investment banking or consulting candidates. If you do tech investment banking you should be in good shape to make the transition, but the general investment banking skill set is highly sought after.

      To get into ER or IB, have a solid GPA, get good internships, and network like crazy! Both are good places to start – equity research is exactly what it is, research. But banking is more execution-oriented (transactions), so you have to see what you prefer. Let me know if you have any more questions – thanks!

      • June 9, 2015

        Abhijeet

        Haseeb thank you so much for the detailed reply.

        I have so many questions peeping into my mind, but i will try to structure them and ask you. But one thing I am unable to break, as you mentioned network is very important, how do I start and progress ? This is an area where I have been trying but have not been able to get success so far.

        • June 9, 2015
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          Haseeb Chowdhry

          Abhijeet – make sure you reach out to friends in Finance who you can get connected to – friends know people 🙂

          • June 12, 2015

            Abhijeet

            Haseeb – How is the financial Analyst profile in the IT companies ?
            I am not able to understand what could be the role of Financial Analyst in IT company and is it a good profile in the long run.

          • June 12, 2015
            user headshot

            Haseeb Chowdhry

            Abhijeet,

            Typically analysts have done some sort of accounting/finance (banking/advisory/audit) or consulting prior to joining as a financial analyst / associate at an IT firm. Equity research is also a great skill set for this.

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