Buy Side Vs. Sell Side in Investment Banking
The terms "Buy side" and "Sell side" are widely used across wall street and investment banking. The two terms categorize types of organizations within the greater financial services industries. On some level, both put in a substantial time understanding industries and companies to predict the winners and losers. But when it comes to the core of the job, they are fundamentally different.
Buy Side vs. Sell Side: Overview
Overview of Sell Side
To put it in layman's terms, the Sell Side refers to firms that are "selling" some sort of of product or service. Typically, Investment Banks are referred to being on the sell-side as these firms sell securities and offer advisory and financing relating services. Sell-side firms are focused on transactional business...specifically helping buy-side firms transact in assets they wish to purchase or sell. They are typically compensated based on the transactions they generate.
Overview of Buy Side
Buy-side firms focus on managing the assets of others and are generally fiduciaries to their clients. A fiduciary role means that the organization has a responsibility to "do what is in the best interest of the client", not only what is suitable for the client - the standard that brokers are measured against.
Buy-side firms could be mutual fund companies, registered investment advisors, hedge funds, or perhaps family offices
What is the source of profit?
Buy side firms are typically compensated by their clientele directly for managing their assets - either as a fixed fee, or more commonly as a percentage of assets under management.
Sell side, however, make most of their earnings from the commissions or fees received in making deals. So, the target for them is not to make the right calls, so much as making the maximum number of deals.
Buy Side vs. Sell Side on Mergers and Acquisitions
M&A buy side and sell side are completely different from the investment banking world.
A Sell side M&A pertains to the analysts working on an engagement where the seller is a client to their investment bank. Whereas the buy side means, the client is the buyer.
M&A sell side jobs are preferred over buy side as when a client has retained an investment banking firm, it means they eventually intend to make a deal which will allow the bank to collect a commission.
Key Differences in Work Hours
The general perception is that buy side has better hours because sell side is subjected to the mood of the clients and can be on call 24/7. In some scenarios that is true. But a more accurate depiction of the hours would be by dividing predictable and unpredictable roles on either side.
Analysts working in deals tend to have more unpredictable work hours because it is highly unpredictable when the deal will be ripe. A lot of global factors influence the decisions into a deal, so it is no surprise to be pulled into work in the middle of the night. Venture capital jobs have better hours as compared to this, but even then unpredictability can be expected.
Analysts who work on the public market have a much more predictable work hour. They have to work as long as the market is open, and there is no chance that a client complaint will pull you out of the bed at 3 AM to deal with some insignificant problem that threatens the deal, and in turn, the commission an analyst makes. Most jobs involving the public market have a weekly 50 to 60-hour range. There are very few deal roles that fall in that range. Deal works are usually higher. The size of the firm is also a major factor that influences the work hours. The bigger the firm gets, hours become more unpredictable.
Compensation Comparison Between Buy-Side and Sell-Side
Contrary to what movies like Wolf of Wall Street would have you believe (please note this movie is NOT what the Investment Banking industry is like), there is not much difference in the average compensation of analysts on either side. The difference is however in the compensation ceiling, which is higher on the buy side. That is if one can invest well.
On the buy side, major hedge fund managers collect millions and even billions in compensation in a year. But the pay average is around $300 thousand per year. According to compensation statistics, only 5% of hedge funds make above $1 million.
People at the top level of the sell side, like managing directors or partners have a lower earning ceiling simply because their earning depends on commissions made from sales. And it does not matter how brilliant someone is, there is a limited time in a day and one can only make so many deals in that limited amount of time.
Unless the economy is always booming and you are at the top position of a firm, making more than a few million dollars is not the norm. especially for people working on researching the industry, making pitch presentations and such.
So when compared at the entry level, reaching the top 1% in the financial industry is quite achievable for talented bankers and analysts. But the income ceiling does get much higher on the buy side.