Buy-Side vs. Sell-Side Analysts: An Overview
Analysts behind the scenes often play a critical role when a company's stock soars or plummets. However, not all analysts are the same. Buy-side and sell-side analysts share the goal of analyzing securities and markets, but their incentives and audience mean that their results will often differ. A sell-side analyst is employed by a brokerage or firm that handles individual accounts, providing recommendations to the firm's clients. Meanwhile, a buy-side analyst typically works for institutional investors like hedge funds, pension funds, or mutual funds. These analysts conduct research and advise the money managers within their funds.
This article will go through the responsibilities, methods, and roles of buy-side vs. sell-side analysts. By understanding each, you'll gain a clearer picture of how these analysts help shape the views of investors.
Key Takeaways
- The main differences between buy-side and sell-side analysts are the type of firm that employs them and the people to whom they make recommendations.
- Sell-side firms include broker-dealers, investment banks, and market makers that give investment services to the rest of the market.
- Buy-side firms include asset managers, hedge funds, and other companies that trade securities for their clients.
- Buy-side analysts evaluate an investment's potential and whether it aligns with a fund's investment strategy.
- Sell-side analysts are known for issuing recommendations such as "strong buy," "outperform," "neutral," or "sell." These analysts typically have more time to learn the ins and outs of an industry.
Buy-Side Analysts
Buy-side analysts work for institutions that invest money on behalf of their clients, such as mutual funds, pension funds, hedge funds, and insurance companies. These analysts conduct in-depth research on securities, sectors, and markets to help their employers make better investment decisions.
The role of buy-side analysts has evolved significantly over time. Until several decades ago, most funds relied on sell-side research from brokerage firms. However, as the industry grew and became more competitive, many large institutional investors began to build their own in-house research teams to gain an edge in the market.
Today, buy-side analysts play a crucial role in the investment process. They are responsible for identifying promising prospects, analyzing financial statements, meeting with company management, and building financial models to forecast future performance. They then recommend to portfolio managers whether to buy, hold, or sell specific securities.
One main difference between buy-side and sell-side analysts is their focus. Buy-side analysts are primarily concerned with making profitable investment recommendations for their own funds. They have a vested interest in the performance of their investments and are often compensated based on the returns they generate. As a result, buy-side analysts tend to be more cautious and risk-averse than their sell-side counterparts. They are more likely to focus on the risks and pitfalls rather than an investment's upside potential.
Buy-side analysts generally cover more areas and sectors than their sell-side colleagues. It's not uncommon for funds to have analysts covering the technology and industrial sectors, while most sell-side firms have several analysts covering particular industries within those sectors, like software or semiconductors.
$112,950
The median salary for financial and investment analysts, according to the U.S. Bureau of Labor Statistics.
Buy-side firms do not usually pay for or buy the sell-side research outright but are often indirectly responsible for a sell-side analyst’s compensation.Usually, the buy-side firm payssoft dollarsto the sell-side firm, which is a roundabout way of paying for the research.Soft dollars can be thought of as extra money paid when trades are made through the sell-side firms.
Essentially, the sell-side analysts’ research directs the buy-side firm to trade through their trading department, creating profit for the sell-side firm. In addition, buy-side analysts often have some say in how trades are directed by their firm, and that can be a key part of sell-side analyst compensation.
Analysts seek to create expert networksthat they can rely on for a constant stream of information. The more they know, the better their calls.
Sell-Side Analysts
The role of a sell-side research analyst is to follow a list of companies, all typically in the same industry, and provide regular research reports to the firm’s clients. This requires the analyst to build models to project the firm’s financial results and speak with customers, suppliers, competitors, and other sources with knowledge of the industry.
From the public’s standpoint, the analyst produces research reports that include financial estimates, a price target, and a recommendation about the stock’s expected performance. The estimates derived from the models of several sell-side analysts are often averaged together to produce theconsensus estimate.
Stocks may make short-term moves based on an analyst upgrade or downgrade or on whether they beat or miss expectations during earnings season. If a company beats the consensus estimate, its stock price typically rises, while the opposite often occurs if it misses it.
Occasionally, sell-side analysts fail to revise their estimates, but their expectations do change. Financial news articles will refer to a whisper number, whichis an estimate that is different from the consensus estimate. This whisper number becomes the newest, although unwritten, consensus expectation.
When an analyst initiates coverage on a company, they usually assign a rating of buy, sell, or hold. This rating is a signal to the investment community, portraying how the analyst believes the stock price will move in a given time frame.
Sell-sideanalysts convince institutional accounts to direct their trading through the trading desk of the analyst’s firm, which adds marketing to their responsibilities. To capture trading revenue, the analyst must be seen by the buy side as providing valuable services. Since information is valuable, some analysts hunt for new information or proprietary angles on the industry. As such, there is tremendous pressure to be the first to the client with new and different information.
That is not the only way to stand out with clients. Institutional investors value one-on-one meetings with company management and will reward those analysts who arrange those meetings. On a very cynical level, there are times when these analysts become high-priced travel agents.
Complicating matters is the fact that companies often restrict access to management by analysts who don't meet expectations,placing analysts in the uncomfortable position of giving Wall Street useful news and opinions (which may be negative) and maintaining cordial relations with company management. Investment bankingis a huge source of profit for banks, and if an analyst makes a negative recommendation, then theinvestment bankingside of the business may lose that client.
Much of this information is digested and analyzed—it never actually reaches the public page—and cautious investors should not necessarily assume that an analyst’s printed word is their real feeling for a company.
| Buy-Side vs. Sell-Side Analysts | ||
|---|---|---|
| Feature | Buy-Side Analyst | Sell-Side Analyst |
| Employers | Asset management firms, hedge funds, pension funds, insurance companies, endowments | Investment banks, brokerage firms, research departments |
| Primary Clients | Internal portfolio managers, investment committees within a firm | Institutional investors, retail investors, brokers |
| Aims | Generate investment ideas and make recommendations for the firm's portfolio | Generate research reports and recommendations for external clients |
| Focus | Generally broader coverage of industries or sectors for internal decisions | In-depth analysis of specific companies or industries for external research reports |
| Research Distribution | Confidential, for internal use only | Publicly distributed through reports, presentations, and client interactions |
| Compensation | Typically salary and bonus based on the performance of the firm's portfolio | Typically salary and bonus based on the quality and impact of research and client relationships |
Key Differences
Although both sell-side and buy-side analysts are charged with following and assessing stocks, there are many differences between the two jobs.
Compensation
On the compensation front, sell-side analysts often make more, but there is a wide range, and buy-side analysts at successful funds (particularly hedge funds) can do much better. Working conditions arguably tilt toward buy-side analysts; sell-side analysts are frequently on the road and often work longer hours, though buy-side analysis is arguably a higher-pressure job.
As the job descriptions suggest, there are significant differences in what these analysts are paid to do. Sell-side analysts are mainly paid for information flow and to access management and other high-quality information sources. Compensation for buy-side analysts is much more dependent upon the quality of recommendations that the analyst makes and the fund's overall success.
Accuracy
Robust models and financial estimates are less important to sell-side analysts than their buy-side colleagues. Likewise, price targets and buy/sell/hold calls are not nearly as important to sell-side analysts as often suggested. Analysts can be below average for modeling or stock picks but still do all right if they give useful information.
Meanwhile, a buy-side analyst usually can't afford to be wrong often, orat leastnot to a degree that significantly affects the fund’s relative performance.
Buy-side and sell-side analysts also have to abide by different rules and standards. Likewise, buy-side analysts typically enjoy less restrictive rules on share ownership, disclosures, and outside employment, at least as far as regulators are concerned (individual employers have different rules about these practices).
What Type of Firms Hire Buy-Side and Sell-Side Analysts?
Buy-side analysts work for firms that manage money, such as hedge funds and private equity groups. In contrast, sell-side analysts work for institutions that sell financial products, such as investment banks and brokerages. Over their careers, financial analysts may switch between the buy and sell sides as they develop contacts and areas of expertise.
How Do Buy-Side and Sell-Side Analysts Collaborate With Other Professionals in the Financial Industry?
Buy-side analysts often work closely with portfolio managers and traders to align their research with their fund's investment strategies. Sell-side analysts, meanwhile, might collaborate with investment bankers, sales teams, and brokers. Analysts may also work with corporate executives, industry experts, and economists to gather diverse kinds of information and data.
Can Buy-Side and Sell-Side Analysts Work at the Same Company?
Yes, some large financial institutions employ buy-side and sell-side analysts, though conflict-of-interest rules stipulate that the activities and knowledge on one side shouldn't find their way to the other.
For example, a large bank might have a sell-side division that provides research and recommendations to external clients while also managing an internal investment arm with buy-side analysts focusing on internal fund management. However, smaller firms typically specialize in one area because fewer resources are involved.
What Other Roles Do Financial Analysts Typically Perform Beyond Issuing Recommendations?
Financial analysts also conduct detailed financial modeling to predict future performance, analyze financial statements, and track economic trends. Analysts may prepare detailed reports and presentations for clients or senior management, participate in earnings calls, and attend industry conferences.
The Bottom Line
The main differences between buy-side and sell-side analysts relate to the type of research they do. Buy-side analysts conduct broad research that often uses information from trusted sell-side analysts to make investment recommendations. By comparison, sell-side analysts research specific industries or sectors to generate sales of financial products.
Buy-side analysts usually work for hedge funds, pension funds, or private equity groups and receive compensation based on the accuracy of their investment recommendations. In contrast, sell-side analysts typically work for investment banks or brokerages and are compensated on the quality of their research and how much revenue it generates.
