Capital markets research is a sell-side career path within the equity capital markets division at an investment bank. A research analyst provides research coverage of public companies and markets that research to the bank’s clients. The bank’s clients are buy-side institutional investors that manage money professionally and may include hedge funds, mutual funds, pension funds, and governments.
They are highly specialized in the industry they research and publish research reports with their detailed financial analysis and recommendations on whether investors should buy, sell or hold (overweight, underweight, or market weight) the stock of that particular company.
Talking with the management of the companies they cover; and
Communicating investment updates to investors and the public.
How is Equity Research Organized?
Sell-side equity analysts normally sit within the equities business within the capital markets division of an investment bank. Analysts are usually divided into geographic and industry sectors to cover similar companies within that industry. The reason that they are aligned that way is to ensure specialization and expertise since most sectors require a lot of specialized knowledge. Examples of the largest sectors in equity research include:
Team structure and reporting lines
Each industry sector tends to have a lead analyst and a team of associates that work to support the lead analyst. Each team will cover at least five companies and could cover as many as 15 companies, depending on their seniority/experience, the sizes of the companies, and the industry.
Unlike other areas of the investment bank, the associate position is more junior and the analyst position is more senior. Equity research tends to be a fairly flat organizational structure (unlike the hierarchy in the rest of the investment bank) and while someone may have the functional role of an equity research analyst, they may have the rank of VP, executive director, or even managing director.
Each analyst will report to a regional head of research, who reports to a global head of research.
Potential conflicts of interest
Given the sensitivity that a recommendation may have on a company’s stock, most research teams are not physically located near the sales and trading (S&T) teams. However, they do work closely with S&T colleagues to market their trade recommendations to the bank’s clients.
Since the mid-2010s, investment banks have had increasing scrutiny surrounding the potential conflict of interests between equity research and investment banking services provided by the same company. The issue stems from the objectivity of a research analyst providing recommendations on the stock of a company whose business the investment bank is trying to win. It is not difficult to see how unscrupulous individuals might promise favorable research in order to win an IPO mandate, for example.
Analysts must also make declarations if they own the stock or have received any benefits from a company that they cover so in most cases, equity research analysts are prohibited by the bank to trade the stocks that they cover.
How do Research Analysts Make Money for the Investment Bank?
As with any business group in an investment bank, research analysts are expected to make money for the firm. This can happen in three ways:
Direct payment for research
With more regulatory scrutiny, such as the MiFID II in Europe, many buy-side investment firms need to make explicit payments for investment research that used to come “free” from sell-side investment banks in exchange for executing stock trades to earn commissions.
Hence, there are direct fees that equity research analysts can generate to provide investment recommendations to clients.
Bundled with execution
For other types of institutional investors who are still allowed to receive sell-side equity research analysis as part of the service that S&T provide, they often will provide rankings of the research analysts to determine what share of wallet is paid to the respective investment bank in terms of stock commissions. As such, the accuracy and insight of the analyst’s recommendations are paramount.
Other ancillary income
Having a highly-regarded equity research analyst or team is also a key differentiator for investment banks to attract new clients or in marketing efforts for other areas of the bank (say, to attract lucrative private wealth management clients to the bank’s private wealth management arm). Hence, many successful research analysts also spend a lot of time marketing in the media, speaking at conferences, and presenting to investors.
What Makes for a Successful Research Analyst?
Simply, to be successful in equity research requires a candidate to be good at modeling and valuations, writing and presenting as well as building a good personal brand.
Modeling and valuation
In order to quickly and accurately digest relevant financial information and turn it into a determination of whether a company’s stock is correctly valued means that a candidate must be able to build financial models that make sense for the company and the industry.
Ability to communicate effectively
Even with the best financial models and valuations, a research analyst needs to be able to convey their findings and recommendations to investors. Being a successful equity research analyst means being able to write convincingly and present your thoughts clearly.
Building a personal brand
This is perhaps the hardest thing to do as many who are interested in being an equity research analyst tend to be more introverted than someone who wants to do institutional sales or be an investment banker. However, since equity research analysts all work with public information, a key part of their success is how much investors want to know your insights. The way to achieve this is to build a strong personal brand.
A Typical Day in Equity Research
On a typical day, equity research analysts start very early. The first thing to do is to review overnight news and trades and study the latest relevant developments from the companies and industries they cover. Most trading floors will have a “morning call,” where equity research analysts are required to speak and update S&T. Salespeople are often consulted to outline what their key clients are thinking and how they are looking to position their investments. Traders are asked for their views on the market.
Once the morning call is done, research analysts take all that information and start to prepare either new research pieces or ad hoc trade ideas to share with S&T and clients. If they are senior enough, they speak with clients and management from the companies that they cover. For junior analysts and associates, they might be updating and refining models. Throughout the day, they monitor the performance of the stocks they cover.
The middle of the day might bring a bit of downtime, as many equity markets close for lunch and clients/sales are away. But in the afternoon, it’s back to the same routine.
While most roles within an investment bank tend to be stressful and fast-paced, equity research analysts tend to have slightly shorter working hours and can be done by 6 pm. However, there can be periods, say when earnings are released, when analysts can work much longer hours to incorporate the latest financial information into their recommendations.
Compensation Factors and Salary Expectations in Research
Equity Research Analysts are well-compensated. Total compensation is broken down into a base salary and year-end bonus. Bonuses are a function of the attributing income that an analyst or team brings to the firm but is also a function of how the equity S&T business performs. As is the case with most jobs in the financial industry, experience is typically associated with higher pay.
As a research analyst moves up through the ranks, they can be expected to handle more important sectors or more prestigious companies to cover. They can also have more analysts working for them and eventually might obtain management responsibilities and the right to determine how their bonus pool is paid to their team, meaning more power and influence.
Job Qualifications for Research Analysts
Roles in capital markets research are rewarding, intellectually challenging, and very lucrative for those who have the right skills.
New research associates are frequently recruited from highly sought-after undergraduate programs across the globe. Backgrounds in economics, finance, accounting, financial engineering, and other quantitative subjects are very useful in landing that first job.
Interested in learning more about a career in capital markets research?