Deciding On Sell-side Offer

Every year the music chair takes place across Wall Street after bonuses, equity research is no exception. This article will make you make a better decision by considering the evaluation process holistically.

The decision points in evaluating a sell-side research role are the following, in the order of importance:

  1. Analyst
  2. Sector
  3. Firm
  4. Compensation

I welcome your comment and feedback (comment box at the end of article). 

    Analyst

    Choosing the analyst is the most important thing. Equity research teams are franchises. Each analyst (the most senior person on the team) has complete autonomy on how to run the team. Effectively, a junior person works for the analyst and the franchise, not for the firm that provides the office space. Given the intensity of the profession, you will spend long hours with the analyst so it’s paramount that there is a pleasant working relationship. During the diligence, focus on the following questions:

    • Is your analyst a good person? If the big boss is a decent human being, all the messes on the job become a little more tolerable to deal with, which increases everyone’s longevity with the team. No one wants to work for a computer keyboard / phone slammer or a screamer. Am I right?
    • Teams with good retention run more efficiently because there is so much “system knowledge” that resides within the existing team members (eg. How the analyst likes research notes and models formatted, etc.).
    • How does your analyst run the team? Analysts should let associates “shadow lead” a subset of companies (eg. On a media research team, Associate A follows cable / satellite / radio, Associate B follows traditional media). Under such model, you develop deep knowledge on a smaller set of names and have a quicker path to building credibility in front of equity sales force and later, with clients. When a client calls, none of them values shallow knowledge about 30+ names – they need your deep knowledge on a few names they are working on. So, depth is more valuable than breath.

    • Get a sense of whether the analyst will give you exposure to clients via 1. delegating you to talk to smaller clients once you prove yourself; 2. listing your name right below the senior analyst’s name on published research reports on a stock that you are the shadow-lead on. The second point is very important, as long as your name is on the bottom (if the team has 2+ people), clients will only ask you to send them notes or models, which are not helpful in building your own brand, for sell-side or buy-side.
    • What is your analyst known for? Truth is, very few sell-side analysts are great stock pickers, but they need to be good at something. Does your analyst’s “something” align with your career goal?
      • For example, if you want to become a good long-term investor, there is no value working for an analyst who is known for near-term channel checks. You can ask your buy-side friends (that fit your investment style) which sell-side analysts they respect the most, those analysts are whom you can learn a thing or two before your eventual move.
      • For those who aspire to become a senior sell-side analyst, this point is not important as long as you get to learn what your analyst does successfully to receive client votes year in and year out.
    • If you are thinking buy-side, Institutional Investor ("II") ranking matters if you are gunning for exits at a MM (multi-manager like Citadel) or shops that use sell-side a lot - make sure to work for an analyst who has a lot of touchpoints with those types of clients. 
    • Because of II voting weights changed from AUM to commission, the analysts that can provide you that access to MM are highly likely to be II-rated. If you are gunning for a buy-side shop that doesn't use the sell-side a lot, know that II doesn't matter to those types of buy-siders, so don't fixate on having to work for a top ranked analyst. However, being II-ranked does mean job stability for you.
    • Think twice about working for a first-time senior analyst, they tend to be younger and eager to prove themselves (think the "II Rising Star" types), they will overwork you and overwork themselves. If you are not that passionate about becoming a sell-side analyst yourself, tough road ahead. 

    Sector

    After the diligence on the analyst, sector decision is simple: prioritize sectors where capital is flowing into.

    For example, a few years back, there was a massive layoff of maritime shipping analysts across Wall Street, and you can see why – no big IPOs, stocks were freefalling because those companies generated negative ROIC, so capital was fleeing the industry. Without investor interest, there is no need for sell-side.

    Conversely, technology and health care continue to attract capital because of secular trends. Simple answer is: go with a seat covering technology or health care, if the analyst diligence checks out.

    If that’s not an option, sectors getting disrupted are not bad places to be – think retail, auto, or casinos where there is a big debate of winners and losers.

    But I want to reiterate: pick a better analyst over a better sector. Prioritizing on sector is futile when you churn out because of a miserable work relationship.

    Unless there is genuine passion for specialized sectors, I would think twice about covering sectors such as banks / insurance and biotech if you have other options.

    The accounting for banks / insurance (completely different from other sectors) or the technical knowledge (biotech focuses more on the science than on the finance) are too specialized that they don’t transfer well if you decide to move to another sector on the sell-side or to the buy-side as a generalist.

    Firm

    With analyst and sector covered, it comes down to whether you want at an investment bank or a boutique. Here is a comprehensive list of sell-side research shops. 

    • Boutique:

      • With a boutique, there is less BS as there are no mandatory IPO initiations, no “make this company BUY-rated because we did the IPO and we (the investment bank) don’t want to lose secondary offering fees” shenanigans, and you can more objectively assess the prospects of the companies.
      • The negative is most boutiques pay below industry average and are slightly less stable because of scale.
    • Middle market investment banks: 

      • Pay and stability are similar to boutiques, but probably are slightly better because banks have other revenue streams.
      • Some of the regionals and larger middle market banks are perfectly fine to work at (with very reputable research analysts in select sectors).
      • Some of the subscale middle market banks are poorly positioned as the industry continues to consolidate.
      • Over the past few years, CLSA Americas and Instinet shut down their US research operations. I think some of the smaller research platforms could be heading in that direction over the next few years, so I stay away from those smaller platforms.
    • Bulge Bracket:

      • Pay is higher and more stable than middle market banks or boutiques, but comes with with more marketing BS and politics.
      • If multi-manager / pod shop is where you want to exit to, bulge bracket has higher proportion of II-rated analysts and provides higher visibility for associates who want to go that route.

    Compensation

    The reason I list compensation last is because variance in base pay and bonus really isn’t very large for early-career associates. If you want to quibble over a $10-30k of base pay spread over 26 pay periods, ignore my article completely.

    Unless the hiring team is providing you a significantly above-market compensation package, you should focus on the previous three factors to evaluate your next offer. Always think about compensation on a lifestyle or risk-adjusted basis.

    That said, money becomes a much bigger factor as you become more senior on the sell-side. As you can see in my salary survey, variance of experienced associates and VP is wider than that for early-career associates (with 1-3 years of experience). So you will have to consider compensation if you are more experienced in the profession.

    Conclusion

    Having been in your shoes, when you are time-crunched and there are so few openings on the sell-side each year, you will have to balance what you value the most out of your next role.

    There is no perfect role, we all know that, but I urge you to prioritize on things that build longevity in the profession. I hope this lays out some of the key factors to think about.

    Of course, there are exceptions to everything I have discussed, but this is the general framework I have come up with.

    Trust me: the money will come later if you offer value, but solving for the wrong things in the near-term (such as prioritizing pay / prestige over people) will not result in success in this profession, and frankly nor in any profession.

    If you are interested in learning more about sell-side equity research, I have two other great articles for you:

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