Investment Banking vs Equity Research: Which Is Better?
What Investment Banking Involves?
An investment banker is a professional who provides advice to companies regarding how they can best raise money and how to complete M&A transactions. An investment banker will help the company to find a financially sound method to obtain funds; the banker will assist the company in determining which companies are good purchase candidates, and which have the potential to grow and prosper through mergers and acquisitions.
Typical Tasks:
- Comprehensive analyses and development of detailed financial models and valuation analyses
- Creation and development of client presentations (Pitchbooks)
- Assistance in completing live transactions, primarily Investment Banking (M&A and Capital Raising)
- Assessment of industry and competitive dynamics
- Co-ordination with internal teams, investors, and advisors, both internally and externally
The Attractiveness of Investment Banking for New Entrants:
Investment banking is characterized by fast-paced learning and high levels of visibility. From day one, analysts have immediate access to information about actual corporate financing, operating strategy, and deal-making on a global scale.
Because of these factors, one reason so many new entrants are drawn to investment banking is the attractive amount and type of compensation offered: Investment banking salaries and bonuses are some of the highest available in entry-level roles in the finance industry. Investment banking is commonly considered to be a significant pathway to successful careers in private equity, venture capital, hedge funds, and corporate development.
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The Disadvantages of a Career
in Investment Banking
- Long and unpredictable hours, which can average more than 80 hours a week.
- Increased stress and anxiety caused by short deadlines.
- Little time for personal pursuits or to maintain a healthy work-life balance.
- Repetitive tasks for a majority of the initial years of a career in investment banking.
What is Equity Research?
Equity research is an analysis of the stock market, which includes evaluating how companies are performing, predicting corporate results, and giving guidance to clients who are institutional investors. Equity research analysts develop a detailed understanding of specific industries and companies and provide clients with the necessary information to make well informed investment decisions.
Primary Tasks of Equity Research Analysts:
Why You Might Be Interested in Equity Research
Analytical problem solving, interpreting data, and having a clear picture of how the business works all make Equity Research a good career choice for those people interested in these topics. For the analyst, this type of work is an opportunity to learn about different industries in depth.
Also, unlike Investment Banking, where the workload is usually heavier for the first year of employment, in Equity Research, the workload is relatively stable at approximately 50-60 hours/week, although net workloads will increase considerably during the earnings season; however, the likelihood of being on the job for longer than 50 hours/week during that time is probably the same as a bank. The path from working within Equity Research to obtaining a Buy-Side Research, Portfolio Management, or Hedge Fund position is much clearer than is true for Investment Banking.
The Drawbacks of Equity Research
- IB salaries and bonuses tend to be lower than their recruitment counterparts in IB.
- Earnings season can often be a source of great stress for equity research analysts.
- Depending on market cycles, job security can be somewhat uncertain.
- Regularly staying up-to-date with what is happening in the markets, what regulations are in place, and what changes occur within various sectors.
Comparison Between Investment Banking and Equity Research
Below is a detailed and simplified guide to both areas of practice:
- A. Necessary Skillsets
IB:Strong use of, but not limited to, Excel, Financial Model Development, Valuation Development, Slide Production, Communication, and Managing Stress.
ER:Analytical Ability, Attention to Detail, Forecasting Skills, Writing Skills, and Knowledge of Current Events.
- B. Work Life
Structure/Culture
IB:An ever-increasing pressure filled environment with long hours and irregular hours of business.
ER: An organized schedule of limited hours within the normal business day and an atmosphere of relative reasonableness.
- C. Salary
Considerations
IB:Efficiency in formula design; use of a minimal number of volatile functions; optimized data structures to decrease the calculation time.
ER: An acceptable salary, but not on a par with their IB counterparts.
- D. Type of Work
IB:High client service, transaction driven, high-pressure environment.
ER:Heavy research, driven by Market need, heavy analytical research.
- E. Career Options after the
Programs
IB: Private Equity, Venture Capital, Hedge Funds, Corporate Development, Business Strategy Consulting.
ER: Buy Side Research Analyst, Portfolio Manager, Hedge Fund, Chief Investment Officer Opportunities.
Which is Better for You: Self-Assessing Questions
The most essential questions to ask regarding your fit for either of these careers are:
- a. Do you prefer
fast-paced transactional work or in-depth company analysis?
If you want to be a contributor to large corporate transactions, you would be a good fit for IB. If you enjoy researching, analyzing and breaking down a company's financials and analyzing the behaviors of the markets, you would be a good fit for ER.
- b. How important
to you is having a good work-life balance?
IB is suited for individuals who thrive in fast-paced, high stress environments and are able to adapt to changes in their workload/availability. ER is suited for individuals who prefer a structured work routine.
- c. What motivates
you more: compensation or analytical thought?
IB offers the higher compensation and prestige earlier on as compared to their competitors in the workforce. ER offers the ability to create valuable information through your research and adequately learn the industry.
- d. What is the
career path you want to go down in the future?
If you are looking to work in Private Equity or into a Strategic Corporate Role, the IB pathway has more avenues than the ER pathway. If you want to be a portfolio manager, buy-side analyst or fund manager then ER is the best place to start.
Career Growth: Both Jobs Are Good, But Investment Banking Has More Opportunity for Rapid Career Advancement
IB: Analysts typically move into one of the elite roles within a couple of years as a Private Equity Associate, Venture Capital Analyst or Corporate Development Manager, as well as Strategy or M&A positions. If you stay in IB you can reach VP, Director and Managing Director levels at which point your compensation will be very high.
ER: While ER people that choose to stay in ER will make Senior Analyst, Sector Head, Research Director and Portfolio Manager positions, experienced Portfolio Managers at large firms typically earn more than an average IB Senior Level Employees.
Which Is Better: Your Decision
There is no definitive answer as to which is "better". "Better" is completely subjective as it depends on what is most important to you.
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If you want Investment Banking:
- Higher Starting Salary
- Ability to work in a fast-paced environment
- Involvement in large corporate matters
- Ability to exit to Private Equity or Venture Capital
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If you desire Equity Research:
- Passion for analyzing businesses and understanding markets
- Like to have a fairly consistent work schedule
- Want to have a long-term career in Asset Management or Portfolio Management
- Enjoy to write, develop forecasts and display your investment ideas to others.
You can build a successful career in finance with either of these complementary paths. Investment banking has a fast-paced environment providing intense work and access to some of the largest transactions you'll likely encounter in your career, whereas equity research allows you to develop in-depth expertise while creating an environment that supports a healthier work/life balance. Ultimately, the best option for you is the one that matches your personality and future aspirations.