Buy Side vs. Sell Side Analysts
What’s the Difference between the Buy-side vs. Sell-side?
The professionals working in the investment industry are generally split into two segments – working on the buy or the sell side the buy side typically work for institutions such as mutual funds or hedge funds, where they directly participate in the m in the market and purchase investments with the aim of generating returns for their clients. On the other hand, the sell-side includes those working at brokerage and/or firms (including investment banks) who provide advisory services, and the execution and/or facilitation of investment transactions for their clients. Sell-side firms aim to support their clients in achieving the best possible outcome in their investment journey. Overall, the buy-side invests capital, while the sell-side assists in transactions and provides insights.
Key Learning Points
- The roles in the investment industry are generally segregated into two categories – buy and sell-side
- The buy-side is where money is directly invested and professional money managers (such as asset management firms) are making investment decisions on behalf of their clients
- Sell-side provide investment ideas and execution services to their clients, but are not directly involved in investment decision-making and portfolio management
- Both career paths offer very attractive opportunities at an analyst and more senior levels, but generally those on the buy-side can be more attractively compensated
Buy-Side Analyst vs. Sell-Side Analyst Example
Both the buy-side and sell-side analysts are highly qualified, and their roles are fundamental to their firms’ business. At the buy-side institutions, analysts are expected to develop deep expertise into a specific area of the market. Their investment universe can be defined in various ways at a sector, region, market cap or investment style level. For example, US technology fund would require their team of analysts to be technology experts and look into that sector (and/or those closely linked to it) only, while a US equity small cap fund would need its team to identify opportunities across all sectors but with a focus limited on smaller companies only. The main responsibility of an analyst at a sell-side firm is to research the market, generate quality investment ideas, keep an eye on existing in the portfolio companies, and provide overall support to the investment decision-making process executed by the portfolio managers. The number of stocks they cover is highly dependent on the firm’s resource and the strategy’s needs and can vary significantly. For example, a large global asset manager can run a strategy which seeks to invest across 40-60 holdings and has a team of 2 portfolio managers and seven analysts. Each analyst may cover approx. 25 stocks (both portfolio holdings and potential opportunities). At teams with less resources, analysts may cover more than 60 stocks each.
The key responsibility of a sell-side research analyst is to produce quality investment research that can be sold to other institutions and investors. Unlike their buy-side peers, sell-side analysts are not involved in direct investing. To make sure their investment ideas are of a high quality, they usually need to present to an investment committee, which then decides should the research be offered to clients. In some cases, buy-side institutions also purchase sell-side research for some areas of the market that are under-researched (for example small cap equities) but this is to complement their own bank of ideas. Again, depending on the firm’s resources, the number of stocks an analyst can cover may range significantly, but generally the number is higher relative to those on the buy-side. When an analyst initiates stock coverage, they typically assign a rating of buy, sell, or hold, which signal their confidence the stock price will move in a specific time period.
Role of the Sell-side vs. Buy-side
Below we highlight the distinct features of the sell and buy-side.
| Sell-side | Buy-side | |
| Objective | To provide research and advice to its clients, and to facilitate their trading of securities and investment products. | Invest capital to generate returns for their clients or for the firm itself. |
| Typical Participants | Brokerage and advisory firms, as well as investment banks (please note here we discuss their trading and research functions rather than investment banking). | Mutual or pension funds, sovereign wealth funds, hedge funds, private equity and venture capital funds, wealth managers and private banks. |
| Typical Revenue Sources | Various fees and commissions. | Management and performance fees. |
| Key Skills | Fundamental analysis, building sell-side materials such as research reports, writing marketing pieces like blogs and articles. | Fundamental analysis, report writing, presentation skills – both to internal (portfolio managers) and external (clients) stakeholders. |
Sell-Side Careers
Sell-side roles offer excellent entry point for graduates that want to develop deep investment expertise and learn how to analyse the fundamentals of different companies. The typical structure at these firms is relatively flat, but this can vary depending on the size of the firm and its team. For example, the research team at a brokerage firm is led by the Head of Research, who typically has two levels of analysts below him/her (senior and junior).
Buy-Side Careers
Buy-side opportunities are typically more limited compared to those in sell-side. They also require more experience and are typically perceived by many including those working on the sell-side. While brokerage and advisory firms offer no exposure to portfolio management and asset allocation activities, the buy-side is a place where investment professionals can develop these skills.
The buy-side roles tend to offer a lot of good exit opportunities that don’t necessarily go outside the buy-side segment. For example, hedge fund professionals may find equally interesting and intellectually demanding roles in asset management, which don’t require the same long working hours. Although not very popular, it is also possible for buy-side professionals seeking a better work-life balance to move to the sell-side. Alternatively, both the buy-side and sell-side may find abundance of opportunities in corporate finance since their expertise in financial statement analysis and company management makes them highly attractive to employers.
Typical Careers Path at a Buy-side Firm
Below is what a typical careers progression path at a buy-side firm looks like.
Buy-Side vs. Sell-Side Compensation
Both the buy and sell-side firms typically structure their remuneration as a base salary and annual bonus. Total compensation is highly sensitive to several factors such as the size of the firm and the seniority of the position as well as the performance of the business in the context of the market environment over the past year. While both offer a healthy base pay (although the buy-side pay is typically expected to be higher), buys-side firms may also offer a significant upside on their bonus payments as it is usually linked to the performance of their stocks (i.e. the ideas promoted to the portfolio managers that found their way into the portfolio).
A investment management firm’s typical team structure and compensation is distinct. However, there is also a difference between the various buy-side institutions with hedge funds and private equity typically offering a higher total compensation relative to asset managers and wealth managers.
The bonus for sell-side roles is usually dependent on factors such as clients’ trading activity and the revenue generated through the execution of recommendations, along with performance of the stocks on “watch lists” (this is the analysts’ coverage and their assigned ratings), individual performance, and the overall business performance.
In terms of working hours, there could be a huge difference depending on the type of the institution. For example, on the buy-side hedge funds and private equity firms are prominent for requiring long hours, often more than 60 but in some cases, they can go up to 80 per week. On the other hand, the sell-side (excluding investment banking) usually offer better work-life balance. A typical work week can be around 50 hours, but that can increase depending on client demands.
How Do the Buy-side and Sell-side Earn a Profit?
Both the buy-side and sell-side companies generate revenue through a number of sources which differ in their nature. The main revenue sources for buy-side entities are management fees, performance fees, and capital gains. We discuss this in detail in how asset management companies make money.
Sell-side firms generate revenues through a number of fees and commissions. Therefore, it’s in their interest to make as many trades as possible, for example brokerage firms engage in the buying and selling of stocks every day and earn a commission when each trade is made. On the research side, they sell its services to a diverse group of investors such as buy-side firms and other qualified investors.
Conclusion
Both the sell-side and buy-side provide essential services for the normal functioning of the market. While the buy-side focuses on investing and growing assets, the sell-side facilitates transactions and provides advisory services. In terms of career paths, both offer very attractive opportunities, but generally the buy-side tends to be the more lucrative area, which, however, requires more experience.
Additional Resources
Investment Banking vs Investment Management
Investment Management Career Path