When I started in equity research, I wondered why salespeople existed on the trading floor. All they do is on the phone with clients every day, wine-and-dine with them and scheduling calls. What’s their value add? This week I argue why equity sales is an absolutely essential feature of equity research.
Before we dive in, please refer to this article to understand the equity research value chain. In short, equity salespeople liaise between sell-side research analysts of their firm and the external public equity investor clients. Equity salespeople add value in the following ways:
- Amplifying: An investment firm with a decent trading budget gets emails from 30+ equity research firms every morning. Let’s face it – do you read all the free newsletters you get this morning? The buy-siders are also not reading most of the emails. That’s where equity sales come in: A salesperson will call a portfolio manager client to deliver a 30-second idea pitch in hopes of generating readership and arranging a call (for a fee) with the analyst who published the idea. Equity research is definitely not a “if you write it, they will read” profession.
- Relationship cultivation: While some smaller hedge funds will never scale, some will become the next large fund. Sell-side analysts just don’t have the bandwidth build intimate relationships with all the hedge funds out there. Salespeople fill that void by cultivating the relationship from the day one fund launch. Shocking fact: small funds want their existence to be acknowledged too. Whom do you think that small fund will allocate trades to when it scales?
- Product-market fit: Investment management firms have widely divergent beliefs on how to make money in the stock market. This makes it hard to have a one-size-fits-all research product. Sell-side analysts are only motivated by growing audience count, but every client wants different things. Salespeople must exist to repackage research to appeal to different clients. A good salesperson takes good notes on their clients’ specific needs: For example, Susan, PM at a deep value fund, likes mining and energy names and has 3 to 9-month time horizon. Nick, the PM at a hyper-growth fund, likes disruptors in consumer sector with hard catalysts. If a sell-side analyst pitched an idea that fits the filter, the salesperson will funnel the idea selectively to her clients, thus improving product-market fit and amplifying the effectiveness of the idea. As the salesperson interacts more with the same client, she only better understands the client needs, which enhances client relationship and should drive incremental trading volume and commission for her firm.
- As an aside: Just like a good salesperson, a good junior buy-sider should discover the kind of ideas her PM likes. Too many juniors pitch ideas they like instead of what their PM likes, which hurts their chance of getting ideas into the portfolio and building credibility. If you cannot get ideas into the portfolio, you are failing no matter how great you are as a stock picker. I have heard failed interviewers tell me “oh yea, I did not get the job, but the idea I pitched totally worked.” Well, who cares. The goal was to get the job, and you failed.
In conclusion, equity salespeople are essential in the equity research value chain.
If you are interested in learning more about sell-side equity research, I have two other great articles for you:
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