Buy Side Vs Sell Side Analysts
Although both sell-side and buy-side analysts are charged with following and assessing stocks, there are many differences between the two jobs.
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 in the favor of buy-side analysts; sell-side analysts are frequently on the road and often work longer hours, though buy-side analysis is arguably a more pressurized job.
As the job descriptions might suggest, there are significant differences in what these analysts are really paid to do. Speaking realistically, sell-side analysts are paid largely for information flow and access the management (and/or high-quality information sources). Compensation for buy-side analysts is much more dependent upon the quality of recommendations the analyst makes and the overall success of the fund(s).
The two jobs also differ in the role accuracy plays. Contrary to what many investors expect, good models and financial estimates have less weight to the role of a sell-side analyst, but can be critical for the buy-side analyst. Likewise, price targets and buy/sell/hold calls are not nearly as important to sell-side analysts as some financial media might seems to think. In fact, sell-side analysts can be below average when it comes to modeling or stock picks but still do alright so long as they provide useful information. On the other hand, a buy-side analyst usually can not afford to be wrong often - or at least not to a degree that significantly impacts the fund's relative performance.
Buy-side and sell-side analysts also have to abide by different rules and standards. Sell-side analysts have to pass several regulatory exams that buy-side analysts do not even have to take. Likewise, buy-side analysts typically enjoy less restrictive rules on share ownership, disclosures and outside employment, at least insofar as regulators are concerned (individual employers have different rules concerning these practices).
There is no real value in arguing who has the better, or more important, job between the sell-side and the buy-side. When the system functions as it should, both are valuable. No buy-side analyst can hope to cover everything and smart buy-siders make a point of quickly figuring out who they can trust and rely on in the sell-side community. Likewise, dedicated sell-side analysts can typically dive deeper than buy-side analysts and really learn the ins and outs of an industry. For readers considering a career on Wall Street, though, it is important to understand the differences and pursue the career path that really best fits their skills and demeanor.
Stephen D Simpson can be contacted at Kratisto Investing