Research investment Banking
Investment banking may no longer be the undisputed first choice for the best and brightest (read "Banks? No, thanks!" by The Economist). Instead of streaming into investment banking, many top graduates are now opting for careers in management consulting, technology or launching their own startups (see this Bloomberg article). While the allure of investment banking may have dimmed, for many finance students, it still remains the top career choice with equity research coming a distant second. Equity research is sometimes viewed as the unglamorous, lower-paid cousin of investment banking. The reality, though, differs from this widely-held perception. In order to help you formulate your own opinion, here's a head-to-head comparison of equity research and investment banking in ten key areas. (Note: By equity research, we mean sell side research that is conducted by the research departments of broker-dealers.)
- Work-life balance: Equity research is the clear winner here. Although 12-hour days are the norm for equity research associates and analysts, there are at least phases of relative calm. The busiest times include initiating coverage on a sector or specific stock and earnings season, when corporate earnings reports have to be analyzed rapidly. The hours in investment banking are almost always brutal, with 90- to 100-hour work weeks quite common for investment banking analysts (the lowest on the totem pole). There has been a growing backlash against the atrocious hours demanded of investment banking analysts, especially after the tragic deaths of three junior bankers in recent years. Although this has led to a number of Wall Street firm capping the number of hours worked by junior bankers, these restrictions may do little to change the "work hard, play hard" culture of investment banking. The most common complaint of those who have quit investment banking is that the total lack of work-life balance leads to burnout. That complaint is seldom heard from those employed in equity research.
- Visibility: Equity research is the winner in this area as well. Associates and junior analysts often receive recognition for their work by being named on research reports that are distributed to a firm's sales force, clients and media outlets. Since senior analysts are recognized experts on the companies that they cover in a sector, they are sought after by the media for comments on these companies after they report earnings or announce a material development. Investment bankers, on the other hand, toil in relative obscurity at the junior level. However, their visibility increases significantly as they climb the investment banking ladder, especially if they are part of a team that works on large, prestigious deals.
- Advancement: Investment banking wins in this area. There is a clear path with defined timeframes for career progression in investment banking. This begins with the analyst position (2-3 years) (read more in How To Become An Investment Bank Analyst), then transitions to an associate position (3+ years), after which one is in line to become a vice president and eventually director or managing director. The career path in equity research is less clearly defined but generally goes as follows—associate, analyst, senior analyst, and finally vice president or director of research. Within the firm, however, investment bankers probably have better prospects for reaching the very top, since they are deal makers and manage relationships with the firm's biggest clients. Research analysts, on the other hand, may be viewed as number-crunchers who do not have the same ability to bring in big business.
- Job functions: Investment banking probably wins here as well, albeit only over the longer term. Equity research associates start off by doing a lot of financial modeling and analysis under the supervision of the analyst who is responsible for coverage of a specific sector or group of companies. But associates also communicate to a limited extent with buy-side clients, top management of the companies under coverage and the firm's traders and salespeople. Over time, their responsibilities evolve to less financial modeling and a greater degree of report writing and formulating investment opinions and theses. However, there isn't a great deal of variability in the job functions of associates and analysts. What varies is the relative time spent on these functions. Investment bankers, on the other hand, spend the first couple years of their careers immersed in financial modeling, comparative analysis and preparing PowerPoint presentations and pitchbooks. But as they rise up the ladder, they get the opportunity to work on exciting deals such as mergers and acquisitions or initial public offerings. Research analysts only get this opportunity occasionally, when they are brought "over the wall" (the "wall" refers to the mandatory separation between investment banking and research) to assist on a specific deal involving a company that they know inside out.
- Designations: The difference here boils down to the Chartered Financial Analyst (CFA) designation or the Master of Business Administration (MBA) degree. The CFA, widely regarded as the gold standard for security analysis, has become almost mandatory for anyone wishing to pursue a career in equity research. But while the CFA can be completed at a fraction of the cost of an MBA program, it is an arduous program that needs a great deal of commitment over many years. Being a self-study program, the CFA does not provide an instant professional network like an MBA class does. The MBA curriculum, on the other hand, by virtue of being more business-oriented and less investment-oriented than the CFA, makes it more suitable for the investment banking profession. However, competition to get into the best business schools—which is where most Wall Street firms hire their associates—is intense. (For more see Should you get a CFA, MBA or Both? and MBA or CFA: Which is Best for a Career in Finance.)
- Skill Sets: As noted earlier, financial modeling and in-depth analysis are common to both investment bankers and research analysts in the earlier stages of their careers. Later on, the skill sets diverge, with investment bankers required to be adept at closing deals, handling large transactions and managing client relationships. Research analysts, on the other hand, need to be effective at both verbal and written communication, and have an ability to make balanced decisions based on rigorous analysis and due diligence.
- External Opportunities: Successful research analysts and investment bankers generally have no shortage of external opportunities because of their experience, knowledge and skills. Research analysts are likely to gravitate towards the buy-side (i.e., money managers, hedge funds and pension funds) while seasoned investment bankers usually join private equity or venture capital firms.
- Barriers to Entry: Both investment banking and equity research are difficult areas to get into, but barriers to entry may be slightly lower for equity research. While it is not uncommon to see a professional with some years of experience in a specific sector or area join a sell-side firm as an equity analyst or senior analyst, this seldom happens in investment banking.
- Conflicts of interest: Although investment bankers and research analysts both have to steer clear of conflicts of interest, this is a bigger issue in equity research than in investment banking. This was highlighted by the U.S. Securities and Exchange Commission's enforcement actions against 10 leading Wall Street firms and two star analysts in 2003, relating to analyst conflicts during the telecom/dot-com boom and bust of the late 1990s and early 2000s. Under the settlement, the firms paid disgorgement and civil penalties totaling $875 million, among the highest ever imposed in civil securities enforcement actions. The 10 firms also had to agree to undertake a host of structural reforms designed to completely separate their research and investment banking arms.
- Compensation: Both investment banking and equity research...