Buy Side vs Sell Side Advisory
WHAT’S THE DIFFERENCE BETWEEN THE BUY SIDE AND THE SELL SIDE?
If you have decided that an investment banking career is for you, chances are that sooner or later you will come across the buy side vs. sell side dilemma.
While starting out working on either side generally falls under the “Wall Street Analyst” job description, there are some differences which you need to take into consideration before a reaching decision on what path to take. Since the choice you make will ultimately determine the type of institution you will work for, corporate culture, and career path, it’s important to understand the differences and opportunities in order to secure your high paying investment banking job and secure the skills you need to land it.
ADVISORY IN A NUTSHELL
As their names suggest, the sell side entails selling while the buy side is related to buying. The buy side consists of different types of companies, such as hedge funds, private equity firms, mutual funds, pension funds, insurance companies and trusts, which buy large quantities of securities hoping for high returns on their investments.
The sell side, on the other hand, is comprised of companies and individuals selling investment services such as brokering, dealing and investment research. Investment banks are generally part of the sell side since they come up with investment ideas which they sell to their buy-side clients.
Another way to differentiate the buy side from the sell side is to describe the sell side as investment banking and the buy side as investment management. An investment bank raises capital by doing anything from foreign exchange trades to helping with M&A deals, while an investment management institution manages a portfolio of investments, stocks, bonds, real estate, etc.
WORKING ON THE SELL SIDE
If you end up working on the sell side, chances are that at least in the beginning you will be employed as a sell side Analyst at an investment bank and much of your job will consist of tracking and analyzing a list of companies, or a specific sector, and providing regular research reports to your superiors. A lot of what you do will involve gathering information, doing financial modeling and valuation work to generate investment recommendations.
In other words, you will perform research and make stock recommendations which will then be sold to others to use for making their investment decisions. Sell-side analysts do not use their research for their own portfolio, but rather, prepare their reports for someone else’s benefit.
TAKE A WALK ON THE BUY SIDE
If you are employed as a buy-side analyst, much of your job will be similar to that of the sell-side analyst, especially on a day-to-day basis with your responsibilities including researching companies and industry sectors, financial modeling, and preparing reports. To sum up, you will do similar technical work, only for a different end-user and purpose.
Unlike the sell-side research, buy-side research is proprietary and is prepared exclusively for the company’s own money managers. In fact, if you work as a buy-side analyst, you will probably use research from sell-side analysts and add it to your own so that you can recommend investment strategies. Working on the buy side also implies more risk as the buy side analyst’s recommendations are intended to generate a return.
AT THE CROSSROAD
As already noted, the actual work that you will have to do is similar regardless of which side you work for. Still, there are a number of key differences that could perhaps help you determine which turn to take at that particular career crossroads.
So, let’s start with the question of compensation. It is often said that analysts working on the buy side get more pay than their sell-side colleagues. This is only partly true and depends largely on the organization that the analyst works for with both sides usually providing good basic salaries as well as performance-related bonuses. Still, it is good to keep in mind that if you work for an investment bank, i.e. on the sell side, part of your bonus can be paid out in shares which you will have to hold for a few years. This is something to think about when you decide to switch employers.
It is also worth noting that the level of compensation is much more contingent on the result in the case of working on the buy side than on the sell side. Results-driven remuneration by definition leads to a more stressful job. While stress is something you will have to get used to regardless of which side you work for, buy-side analysts generally tend to be under more pressure. While a sell-side analyst can sometimes get away with a below-average recommendation, buy-side analysts cannot afford to be wrong quite as often, with their analysis directly impacting the investments of a particular fund. On the plus side, this implies a more challenging job with a higher degree of satisfaction.
Another point for consideration is the opportunity for career advancement. While this is also highly dependent on the institution, climbing up the ladder when working in a smaller fund is considered easier than in the case of a large investment bank. A large organization on the other hand is likely to offer you a bigger number of opportunities to advance your career in finance.
AT THE END OF THE DAY
As with most things in life, there are various pros and cons to working on either side. What makes the choice even harder is that pretty much everything, including pay, working hours and career advancement opportunities, depends on the institution where you’ll end up working. The good news is that whatever you choose, your decision does not need to be final; you can jump to the other side somewhere down the long and winding finance career road.