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
- Compensation: Investment Banking
- Lifestyle: Equity Research
- Quality of Work: Equity Research
- Exit Opportunities: Investment Banking
While equity research is less glamorous than investment banking, it deserves a close look.
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