Bull Bear Report Mar 17 2011

So You Want to Be an Equity Research Analyst

By julie steinberg

If you've got a knack for financial modeling and you're interested in learning the minute details of various companies' operations, equity research may be for you. It may not seem as glamorous as investment banking, but seeing your name on a report you've helped to write adds a sense of genuine satisfaction to the job, equity research analysts say.

Related: How to Write the Perfect Equity Analyst Resume

What It Is

Equity research analysts work on both the sell side and the buy side. Sell-side researchers will work at an investment bank or independent research company, while the buy side typically indicates hedge funds or investment management.

On the sell side, researchers develop earnings and cash-flow models of the companies they follow, said Paul Leming, an independent analyst affiliated with Soleil Securities, a New York-based equity research, sales and trading firm. The research is driven by stock performance: Is Google, for example, a good investment for a shareholder?

A sell-side analyst will cover a specific group of companies and "know more about less" compared to a buy-side analyst, said Richard Lipstein, a managing director at Hawthorne, N.Y.-based Boyden Global Executive Search. For example, an analyst might cover 12 oil-services companies, write reports and make presentations to the clients, which may include investment managers like Fidelity and Putnam.

On the buy side, an analyst will probably follow 30 to 40 companies in two to three different industries, Leming said. The buy-side analyst focuses on suitability elements for the client involved. They don't publish their research like sell-side analysts do, but instead feed their insights to the portfolio managers who are managing money for the client. Reports can range from two to three pages after a company's earnings to 10 to 15 pages for a longer outlook piece.

Not all analysts have to cover companies, however. Christina Wood, an associate in global emerging markets at Citigroup, analyzes macro trends across countries, a job for which she must stay on top of current events. With the recent protests in Egypt, for example, Wood's team examined how they would affect gross domestic product and how the country would be affected from an investment standpoint.

The Pay

Equity research analysts are classified as financial analysts in Bureau of Labor Statistics data. There are 235,240 in the country. The mean salary for an equity research analyst is $85,240, while the highest-paid 10% of analysts bring home more than $139,000 a year, according to the BLS. Those numbers refer to salary alone and do not include bonuses, benefits or perks.

For total compensation, a junior analyst or associate can expect to make between $100,000 and $200,000, according to Michelle Dounis, a senior analyst at Johnson Associates, a compensation consulting firm specializing in the financial-services industry. A vice president, principal or director can expect to pocket $400,000 to $600,000, while senior level staff such as managing directors can take home $750,000 to $1.2 million.

A star analyst can take home $3 or $4 million a year, said Lipstein of Boyden Global Executive Search.

The Lifestyle

The hours required are less intensive than investment-banking hours. Wood said she typically logs 12-hour days, from around 7 a.m. to 7 p.m.

Be forewarned: Arriving early is often the name of the game on the sell side. "Sell-side firms tend to produce morning packages that go out to clients," said Andrew Root, the head of U.S. equity research at Macquarie. "As a result, you tend to start your days very early."

Root observed that clients on the sell side expect to have communications in the morning, and analysts produce notes daily. "Every day there is something to communicate with clients about," he added.

The position may offer greater flexibility than other finance jobs. At Morningstar, a Chicago-based independent investment research firm, analysts work 50 to 60 hours a week, but the company is flexible about where they do their work. Analysts can work until five, for example, go home and see their families, and then continue working.

"There are so many ways to measure someone's output. Did they produce as much as research as they needed to produce?" said Heather Brilliant, Morningstar's director of equity analysis. "Why would you measure someone based on face-time?"

You'll also be required to work well on a team. You'll be organized by sector, such as energy or telecomm, into teams with anywhere from two to 20 people. For example, Morningstar has about 12 analysts on its basic-materials team, four based in Sydney and about eight in Chicago.

At Macquarie, a team will have a minimum of a senior and junior analyst. If there are "north of 15 stocks under coverage" juniors will be added, said Root. There are eight people on the firm's team that covers banks.

Everyone's name will go on report that are produced, with most of the credit (and glory) going to the senior analyst. The amount of time it takes junior analysts to have their names appear at the top of reports varies.

"It depends how unique and interesting your insights are," Root said. It takes some people five years and other people 10 years to become a top-tier resource. Wood estimates that in her sector at Citigroup, it will take eight to 10 years to reach senior status.

The Criteria

There are a few classic routes to get into this business, said Leming of Soleil Securities. Sometimes undergraduates can enter the field right after graduating, or you can break in after attending one of the top 10 MBA programs. Another way is to spend five to 10 years working in an industry, establish yourself as a veteran, then segue into an analyst's position covering companies within that industry.

When it comes to academic background, you should ideally have a business degree with a concentration in finance. You'll need to know accounting, and "you better be somewhere between very computer-proficient and extremely computer-proficient," Leming emphasized.

Liberal-arts majors aren't out of luck, though. Both Macquarie and Morningstar said that a liberal-arts background wouldn't prevent them from hiring that person. Indeed, those with different points of view are welcome.

What they did stress is the ability to write. If churning out papers as an undergrad wasn't your forte, you may not be an asset to the firm you're trying to join. You'll need to be able to argue your case well for a valuation in clear and concise terms the client can understand. You'll be contributing to reports nearly every day, so you'll have to be comfortable with written communication.

Firms are also looking for those with intellectual curiosity: people who want to understand every tiny detail about a company and the implications for their clients' portfolios.

On the sell side, once you move up the ladder, you'll need to know how to market yourself and your research, according to Lipstein. You'll meet with clients and must be able to persuade them that your insights are a necessity. Effectively, you'll be a salesperson for the team.

The Credentials

An MBA isn't a requirement to land the position, though a CFA would prove useful.

"Do you need a CFA? No. Does everyone in this business tend to go after one? Yes," Lemming said. You won't have to get the certification before you join a firm, however, so you don't have to worry about it beforehand.

If you are preparing research that will be made public, you will have to sit for your Series 86 and 87 licenses, according to data provided by FINRA. You can only take those exams after you've joined a FINRA-member firm, usually a few months after you start. There's no fixed timing; Wood at Citigroup has been with the firm for 9 months, has taken her series 87, and is studying for her series 86.

With regards to other certifications, some firms require analysts to have their Series 7 and 63, while others require no certifications. Morningstar, for instance, conducts its own writing exercise before an applicant is hired. The test is composed of four essay questions, one of them usually an accounting question such as: "If revenue is increasing and net income is increasing but cash flow from operations is decreasing, what could be causing that?" Each firm has its own approach.

The Best Part of the Job

Because the economy's always changing, it's easy to stay stimulated and interested in what you're doing. "At a lot of jobs, after two years you stop learning or get a little bored," Wood said. "But I don't see myself getting bored. Every day is different for me."

You're competing with other analysts at other firms to put out the most salient, thoughtful research, an intellectual exercise that will keep you on your toes. In other words, you're not just putting figures into a spreadsheet and hitting "compute."

The Worst Part of the Job

A rapidly changing economic landscape is a double-edged sword. "The toughest part can be that in a fast-moving industry, some great work you've done might become less relevant quickly," Root said. "For example, you may have performed some terrific analysis on a company, and the next day it gets acquired." A report you've done could be rendered useless in a matter of hours, so you'll need to be able to go with the flow and move on to the next.

Who's Hiring

Both Macquarie and Morningstar are hiring equity research analysts. Morningstar will hire analysts to cover the financial services industry. Jefferies and Nomura made key hires in 2010 and plan to make more this year; a Nomura spokesperson declined to specify how many.

When applying to these firms, keep in mind that while cover letters might be just a formality for some other positions, in this case they're a demonstration of your writing skills. Don't underestimate the premium HR will place on them.

"If you don't show you know Morningstar and express why you want to work here, it's hard for me to get excited for you," Brilliant said. "This is the business of writing. We read cover letters religiously."

Write to Julie Steinberg

Related: How to Write the Perfect Equity Analyst Resume

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