Careers: Equity research versus investment banking

Investment banking may no longer be the undisputed first choice for the best and brightest. Instead of streaming into investment banking, many top graduates are now opting for careers in management consulting, technology or launching their own startups. 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 10 key areas. (Note: By equity research, we mean sell-side research that is conducted by the research departments of broker-dealers.)  

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.

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.

Major financial jobs tend to be concentrated in major financial hubs such as New York, Chicago, London and Hong Kong. This is no different for equity research analysts and especially investment bankers, many of whom are paid to relocate to their firm's home city.

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.

Investment banking wins in this area. There is a clear path with defined time frames for career progression in investment banking. This begins with the analyst position (two to three years), then transitions to an associate position (3-plus years), after which one is in line to become a vice president and eventually director or managing director. (Read more in How to Become an Investment Bank Analyst.)

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.

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 presentations and pitchbooks. But as they climb 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.

A bachelor's degree is a must for any aspiring equity research analyst or investment banking associate. Common areas of study include economics, accounting, finance, mathematics or even physics and biology, which are other analytical fields. However, it is very unlikely a bachelor's degree alone will be enough to get a job in these fields.

The difference between an investment banker and an equity researcher 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. Many aspiring investment bankers enter into some other financial field, perhaps working as analysts or advisors, and work toward their MBA. (For more, see Should You Get a CFA, MBA or Both?)

Investment bankers should have an impressive knowledge of financial markets, investments and company organization. Many pursue their Series 7 or Series 63 FINRA licenses to demonstrate this knowledge. The most common career path for investment bankers involves graduating from a prestigious university before working for a major global bank, such as Goldman Sachs or Morgan Stanley. After a few years, the aspiring investment banker returns to complete an MBA or receives professional certifications and licenses. When all is said and done, it may take five to six years after receiving an undergraduate degree before being considered for an investment banking role.

Both jobs require a great deal of analytical and mathematical/technical skills, but this especially applies to equity research analysts. These analysts need to be able to perform complex calculations, run predictive models and prepare financial statements with quick turnarounds.

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.

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 toward the buy side (i.e., money managers, hedge funds and pension funds), while seasoned investment bankers usually join private equity or venture capital firms.

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.

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.

Both investment banking and equity research are well-paid professions, but over time, investment banking is a much more lucrative career choice.

Investment bankers are famous for their high pay and large signing bonuses. According to online finance community Wall Street Oasis, summer interns earn the equivalent of around $70,000, plus a signing bonus of around $10,000. First-year analysts at major banks such as Bank of America Merrill Lynch, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo earned an average salary of $85,000 in 2017, while their bonuses averaged $43,000. For the third-year analyst, the average salary jumped to $91,000 per year with $53,000 in bonuses.

The real money makers, however, are investment banking associates, who earn an average salary of $138,000 and $77,000 in bonuses, with first-year associates likely making less and third-year associates making more. And it is not unusual for total compensation for a vice president or managing director to exceed $400,000 annually.

The average equity research analyst earns about $97,000 in annual compensation, according to Glassdoor. Research analysts also indirectly generate revenues through sales and trading activities that are based on their recommendations. The reputation of a firm's research department may be a significant factor in swaying a company's decision when selecting an underwriter when it has to raise capital. But even though the investment firm may make a substantial amount through underwriting fees and commissions, research analysts are prohibited from being compensated directly or indirectly from investment banking revenues.

Instead, research analysts are compensated over and above their salaries from a bonus pool. These periodic bonuses are determined by a number of factors including trading activity based on the analysts' recommendations, the success of such recommendations, profitability of the firm and its capital markets division and buy-side rankings. Nonetheless, entry-level investment bankers may receive total compensation that may be anywhere between 20% and 50% higher than their research counterparts, and this gap may widen markedly over time.­­­­­­­

Overall, if one has to make a choice between embarking on a career in equity research versus one in investment banking, factors such as work-life balance, visibility and barriers to entry favor equity research. On the other hand, factors like prospects for advancement, job functions and compensation tilt the scales in favor of investment banking. Ultimately, however, the choice comes down to your own skill set, personality, education, and ability to manage work pressures and conflicts of interest.