Everyone hears a lot about investment banking while in school, and it seems to be the coolest thing since the wheel. The point of this post is not to bash on sellside, but just to give an idea of why many people prefer the buyside. Equity Research
A different industry
Investment banking is really concentrated in a handful of major firms, with boutiques and regionals often scrambling for footholds. The sellside requires a great deal of capital to establish a complete product line. Therefore, it’s unlikely that you are going to be able to start your own firm — you’re going to be working for one behemoth or another until you retire or move over to the buyside anyway. Just like commercial banks, investment banking is quickly becoming an industry with just a few real players.
Look at the investment management industry and you’ll see a totally different picture. While there is certainly an impetus towards industry consolidation on the buyside, the impetus is a great deal weaker than that on the sellside. The buyside has far lower capital requirements to start new firms. In addition, plan sponsors (the foundations, universities and pension plans who control vast pools of money) are always on the lookout for new investment managers with different strategies or expertises. Therefore, once you’ve established yourself in the industry as being particularly good at managing a particular kind of fund, you will have the opportunity to open your own firm. This is why we see the landscape of thousands of buyside firms.
Flexibility in location
Most investment bankers work out of three cities: New York, London or Tokyo. Part of the investment banking trade is being close (physically close) to the markets themselves. Customers pay investment bankers for that experience with the markets on a moment-by-moment basis.
The buyside, however, draws its profits not from trading or offering securities, but by gaining assets from plan sponsors and individuals. Plan sponsors are located all over the United States — corporations and unions in Detroit need investment managers just as much as a foundation in Los Angeles or a university in New Hampshire or a government pension plan in Tallahassee. Therefore, one can find good buyside shops all over the United States — from Anchorage to Miami. While the large concentration of firms is in New York and Boston, with lesser concentrations in Chicago, San Francisco, Minneapolis and Los Angeles, there are numerous firms in all major cities (and many smaller ones). Examples include McKinley in Anchorage, USAA in San Antonio, Federated in Pittsburgh, Smith Breeden in Chapel Hill, N.C., Munder in Birmingham, Mich., Invista in Des Moines, T. Rowe Price in Baltimore, or Columbia in Portland — I could go on for hours.
Invest the way you want
Investment banks generally perform analysis in very similar ways. How a potential IPO candidate firm is valued at Goldman will not be very different from how Morgan Stanley will value it.
The buyside varies wildly in terms of styles, strategies and investment philosophies. A quant firm will not even have the same kinds of personnel as a fundamentalist firm. An analyst at a large-cap growth firm will do very different types of analysis (or at least, on very different sorts of companies) as a small-cap value firm. It’s up to you to choose.
Investment banking firms (generally) receive their money from advising corporations in large transactions (offerings, mergers, divestitures, etc). These events occur over a relatively short time-frame. The job of the banker is to get the transaction done as quickly as possible and collect your fee. Generally, these transactions take from weeks to months. You as a banker have relatively little control in how slow or fast the transaction occurs — generally, at a frenetic pace.
As an investment manager, I have the luxury (and necessity, in my case) of taking a long-term view. While admittedly, some mutual funds have their values posted on a daily basis, most investors evaluate their managers on a quarterly or yearly basis (though monthly performance is sometimes used). The time-frame of investment management shops varies considerably from the seconds of some quant shops to multiple years at some value shops. Therefore, again, you can pick the type of investing you prefer.
Differing firm cultures
Most investment bankers have very similar backgrounds. Generally, they are under 45, have an MBA from a prestigious business school and entered the business at a relatively early age (usually right upon finishing their degrees).
Buysiders vary considerably. Some of my best friends in the business are over 60 — one is over 80 and still relatively active in his firm. Many have widely varying academic and work backgrounds, including extensive experience in industry. Though most have MBAs, they often have other graduate degrees and interesting undergraduate degrees as well. Basically, I find the buyside community a great deal more interesting and fun to interact with.
This diversity is reflected in the firms you will encounter in your career. A quant firm may be full of science PhDs and ex-computer programmers. A high-tech sector firm may have young MBAs with experience at major high-tech firms. A value firm may be full of ex-accountants. An aggressive hedge fund may be composed of gung-ho traders. Some firms will have an explicit commitment to their community and sponsor numerous charities in their area, while others will not. I have found that the buyside is a much more human place to work than the sellside. Again, it’s up to you to choose.
A career for a life-time
There are few investment bankers in their 50s. The pressure, time commitment, office politics, intense travel schedules, etc. will drive all but a few out of the industry. More importantly, most come to question whether the sellside provides enough benefits for its immense drawbacks. The money is good, but many come to conclude that peddling securities for large corporations is not a worthwhile activity to spend the remainder of their lives on.
On the other hand, there are numerous buysiders working well into their 60s, 70s and even beyond. Not only is the pace such that you can be on the buyside past the age of 45, most buysiders love the business. Our work enables people to retire comfortably, foundations and charities to continue to benefit the community, and universities to expand educational opportunity. Meanwhile, we get to do that using the investment methods we enjoy most at the paces that we’re comfortable with.
The career for the curious
The buyside has a certain intellectual freedom that the sellside does not. As a buysider, I am allowed to hold any opinion about a particular firm that I want. I could say that [some Fortune 100 company]’s strategy is entirely wrong-headed, their management foolish, their industry going downhill on an iced slope and their finances disorganized. Not only would I not be reprimanded but even analysts who like the company would want to find out why I thought the company was a poor investment (they may not agree, but they would want to test out my ideas).
Sellsiders do not think in that kind of broad terms. Their job is to get the deal done and collect the fees. While you will learn a great deal in corporate finance, your time is not your own but the client’s. In a merger, you will spend your time trying to make the deal look as good as possible — it’s not your place to say that the whole idea was wrong, or what effect the merger would have on the industry, and so on. In a public offering, your job is to make the company look as good as possible. It is true that investment banks turn down numerous assignments that the senior management feel are bad deals. At a junior level, however, you will have no say whatsoever over what deals you will do.
On the buyside, you will not be told what ideas (in your industry) to cover. In fact, it is your job to tell your portfolio managers what ideas you like. They may request that you look at a particular firm or idea (it may be in the portfolio already or just an idea they themselves got elsewhere). However, this is a request for your actual opinion. If you feel the idea is a poor one, you are expected to say so (and, of course, be able to defend that opinion well). You are not expected to agree with your PMs on all occasions. In fact, you are to bring greater understanding than they have on your area of expertise.
There are a lot of good reasons to get a job on the sellside. However, a lot of students enter the sellside with hyped and unrealistic expectations (some of which they get from the firms, some from their unknowledgeable and ignorant fellow students). Most buysiders aren’t yelling about how great our profession is from the rooftops. Buysiders are often a low-key bunch. So, when your class hot-dog is running his mouth about how great his job in investment banking is going to be, take the cue — let him run his mouth while you take the job on the buyside. And don’t let him know what he’s missing — you don’t need the competition from him anyway.