The buy-side vs. sell-side
If you've ever spoken with investment professionals, you've probably heard them talk about the "buy-side" and the "sell-side." What do these terms mean and how do the two sides of the Street interact with one another?
What's the difference?
Simply stated, the buy-side refers to the asset managers who represent individual and institutional investors. The buy-side purchases investment products with the goal of increasing its assets. The sell-side refers to the functions of an investment bank. Specifically, this includes investment bankers, traders and research analysts. Sell-side professionals issue, recommend, trade and "sell" securities for the investors on the buy-side to "buy." The sell-side can be thought of primarily as a facilitator of buy-side investments --the sell-side makes money not through a growth in value of the investment, but through fees and commissions for these facilitating services. In this chapter, we'll take a brief look at the types of jobs on each "side." The rest of the book will look at the buy-side in detail.
Jobs on the buy-side
Buy-side firms are structured in a far less formal manner than sell-side firms. Consequently, career paths are more flexible and job descriptions vary more from one firm to another. In general, buy-side firms have a three-segment professional staff consisting of:
- Portfolio managers who invest money on behalf of clients
- Research analysts who provide portfolio managers with potential investment recommendations
- Marketing and sales professionals who distribute the investment products to individual and institutional investors
When beginning your career on the buy-side, you typically will start as an assistant or associate in one of these three areas.
How the sell-side works
Sell-side firms earn a trading fee every time a security (such as a bond or a stock) is bought or sold in a buy-side firm's portfolio. Because portfolio trades can generate sizeable commissions, sell-side firms (investment banks) have quite an incentive to develop relationships with the asset managers. Through institutional salespeople, investment banks provide asset managers with services such as analyst recommendations and access to firm-sponsored IPOs and debt offerings. Additionally, the traders and salespeople who want asset managers' business will often present them with gifts such as expensive dinners and tickets to sporting events. An investment management professional in New York says, "I have been to a Yankees games, a Knicks game, the U.S. Open, a rock concert, and eaten at over a dozen of the city's finest expensive restaurants. It's good to be the client." At the same time, another insider from a major asset management remarks, "It's important to be somewhat conservative. No firm wants to have it known that their guys have a lavish lifestyle and are out partying all night long; it might make it hard to convince the Carpenter's Union that you will do the best job possible managing their money."
Structure: Buy-side vs. sell-side
In general, investment management companies are less structured than most other types of finance firms, including investment banks, commercial banks and accounting firms. As a result, investment management positions have less-defined job descriptions than positions at other types of finance firms. Job descriptions for similar titles in the investment management industry differ from firm to firm. And only the largest firms in asset management have all of the positions described in this book. That said, when interviewing for investment management positions, you should ask your interviewer to clarify exact job responsibilities. By doing so, you'll not only gain insight into the position, you'll also sound informed about the (lack of) structure in the industry.