Buy-Side vs Sell-Side is the prevailing perception at Wall Street. Most finance careers here are categorized into either Buy-Side or Sell-Side. So what is the difference between the Buy-Side and Sell-Side? What do you need to know to pick the most favorable career you want to pursue?
1. Buy-Side vs Sell-Side: Definition and Critical Distinction
Let’s look at the picture below to understand how corporations, Buy-Side firms and Sell-Side firms work together in the capital market. For the sake of simplicity, it’s just as easy as, basically, there are three parties being involved in the capital market. One party is a Corporation who wants to raise capitals by issuing securities. One party that has money and wants to make an investment into the corporation is called the Buy-Side.. The last one, who acts as the middleman between Buy-side and Corporation and advises on transactions between the two, is Sell-Side.
Let’s dive deep into each of them.
1.1 What is Buy-Side?
The investment strategy is easily understandable. These funds are called institutional investors, including a pool of individual investors or companies. They convince those investors to put money in their funds, then pour the money attracted into lucrative assets. Buy-Side firms make money on those assets. After a period of time, when a firm grows, an asset price soars up, Buy-Side firms sell them out at a premium to make billions of dollars, if not millions.
1.2 What is Sell-Side?
Definition: As opposed to Buy-Side, Sell-Side refers to financial service firms, offering a wide scope of financial services to both corporations and Buy-Side firms in financing, mergers and acquisitions, capital raisings, strategic developments, restructuring, and etc. The most notable role in the capital market is that Sell-Side firms facilitate the issuance of securities of corporations for capital. In addition, another primary goal of Sell-Side firms is to assist corporations that need capitals to seek prospective institutional investors (Buy-Side firms), and Buy-Side Firms, which look for opportunities to put money into.
2. Buy-Side vs Sell-Side: Working Progression, Salary, Working Hour, and Exit Opportunity
Having known about the definition of the two sides, you might wonder which career path is right for you?
Finance workers care much about their Career Promotion, Compensation and the Volume of working hours each week. Here’s what you need to know about the features of the two sides.
At a junior level, such as Analyst and Associate, whichever side you are in, your income mostly comes from fixed monthly salary plus generous bonus at the end of a financial year. Both sides are famous for their compensations for employees right out of school. The most important thing here is what kind of nature of work you are interested in and what type of side you find yourself suitable for a long-term career?
There is a prevailing pathway for finance students that: First, you get an offer from an Investment Bank. After years of accumulating experience, you switch to more glamorous Buy-Side firms such as Private Equity, Hedge Fund and Venture Capital with a belief of more handsome remuneration, slightly better working hours and less bureaucracy-laden structures.
Is that right?
2.1 Working Progression
At both Buy-side and Sell-Side firms, you will start off your career as an Analyst within two to three years depending on each firm, then get promoted to Associate and higher positions.
Specifically, On the Sell-Side, you will start as an Investment Banking Analyst, the hierarchy will be like:
The ceiling level at most firms is Managing Director. Still, there are some firms having the Partner position. It’s no big deal. Whatever the title is, the roles rarely differ between firms.
However, there’s one thing on the Sell-Side you might know. Sell-side firms like Investment Banks have a rigidly hierarchical structure. It takes 2-3 years to move up to Associate from Analyst, 3-4 years to Vice President. With exceptional performance, you can trim down the gap to get promoted, however, it’s almost fixed and you can’t do too much to progress quickly. That’s why after several years of working at Investment Banks, analysts and associates tend to switch to Buy-side jobs such as Private Equity and Hedge Fund where the advancement is more flexible and their skills can be further exercised and honed.
On the Buy-Side the hierarchy includes positions as follows:
At Private Equity, the structure largely resembles Investment Banking
At Hedge Funds and similar funds as Hedge funds like Mutual Funds, Asset Management Funds, there’s a little bit different because the highest level in the hierarchy is Portfolio Manager(PM). Below PM are Research Associate and Research Analyst.
At Hedge Funds and different forms of asset managements, the hierarchy is leaner, with just a few people supporting the Portfolio Manager:
The advancement on the Buy-Side is largely based on your own performance. It means if you perform exceptionally, you could progress quickly and vice versa.
In actuality, the salary is NOT quite much different between a Buy-Side role and a Sell-Side role at the junior levels. Buy-side firms, however, generally offer the higher ceiling relative to Sell-side firms.
Side-Side: You can see the Investment Bankers’ salary here, investment banking analysts start off their career with a salary level of around $80K to $90K (doesn’t take bonus into account). For levels such as Partners and Managing Directors, you could make a few millions of dollars a year if you are particularly outstanding. This level of income at the management level is less than that at Buy-Side firms such as Private Equity or especially Hedge Funds. Works at Sell-Side are viewed as something “passive”, because no matter how exceptional you are, you still only have a limited amount of time to do more. Another reason for the lower compensation is that deals at Buy-side are generally far more lucrative.
Buy-Side: At a junior level, the salary at Buy-Side firms is not really different while the number of slots offered annually is limited. However, as you move up the career ladder to Portfolio Managers, top hedge fund managers could make hundreds of millions, even billions. This level of income is unrealistic with top investment bankers. The compensation of Buy-Side jobs (aside junior levels) largely hinged on the number of successful investments you make. But the number of portfolio managers who could make hundreds of millions only account for a small portion, the average pay at mega hedge fund firms is approximately $320K. Though it doesn’t represent Buy-Side firms, you can use it for reference purposes when compared to Sell-Side firms.
Let’s look at the table about the comparison between Investment Banking (representing Sell-Side) and Private Equity (representing Buy-Side), for reference purposes only.
Total compensation (Salary & Bonus)
$100K – $150K
$150K – $200K
$150K – $300K
$250K – $400K
$250K – $400K
$500K – $800K
$500K – $700K
$700K – $2,000K
$500K – $1,000K
Source: Heidrick & Struggles 2019 survey, Firm research
Put those reference figures aside, then no matter which side you are working for, you belong to the top 1% of earners in the finance industry.
2.3 Working Hour
Sell-Side: The working hours at Investment Banking are crazy. The number of working hours can be around 70-90 hours a week during the busy season. Sometimes, you are expected to extend your working hours to midnight if last-minute emergency tasks happen. Still, it doesn’t mean all Sell-Side jobs are that busy. Office workers at Sell-Side firms such as corporate banks, smaller investment banks spend less time working and can create work-life balance by going to the gym, going out with friends, and family.
Buy-Side: People rarely talk about the working hours at Buy-Side firms. The working hours, however, is supposedly less stressful than that of Investment Banks. Though the working hours are not really as comfortable as it seems at mega funds, at least you won’t be woken up at night or assigned emergency tasks on the weekends as at bulge bracket investment banks. The size of funds and the number of deals affect how long you would have to work.
2.4 Exit Opportunity
You can hear a lot of people say that most bankers leave Investment Banks for glamorous Buy-Side roles at PE, HF. It’s common, but it’s also difficult. Buy-side firms provide a limited number of slots in the On-cycle program for bankers to pave the way for them to PE and HF. That results in a severe competition to get hired at those firms.
For more details of career pathways after Investment Banking, you can see Investment Banking Exit Opportunities here.
3. Buy-Side vs Sell-Side: What Bankers and Portfolio Managers do
Since the jobs on the Sell-Side are more of deals and advisory and the ultimate goals are to arrive at recommendations to clients, the two main responsibilities of bankers include :
- Facilitate capital raisings including the issuance of debt and equity, private placements of capital
- Advise on strategic transactions including Mergers & Acquisitions, divestitures, strategic development, restructuring, and etc.
Details of what they do would be like: deploy extensive knowledge to conduct financial modelling and valuation (for starter levels), build rapport to win new deals consecutively (for high levels), position the corporation to prospective investors (Buy-Side), draft marketing materials, form compelling investment thesis. In the nutshell, it’s underwriting, the process which an investment bank is responsible for offering the service all along – for example: from advising on the issuance of equity to identifying prospective buyers to buy stocks, shares)
On the Buy-Side, the jobs sound more active and managerial. Specifically, a Portfolio Manager (PM) are responsible for:
- Grow assets under management (AUM), if the return of a fund in a period of time falls below the hurdle rate, he/she wouldn’t receive incentive fees
- Manage the client’s money and make investment decisions on behalf of clients
- Look for investors to recruit capital
- Perform research, financial modelling and valuation (starter levels)
4. Buy-Side vs Sell-Side: Why Financial Modeling is Important for Both Sides
Financial Modeling and Valuation are an integral part in any interview with Investment Banking and Private Equity, Hedge Fund. You won’t want to get screwed up by tumbling on this type of question.
Especially Sell-side jobs, Investment Banking analysts and associates do a variety of financial models to analyze, assess and arrive at the recommendations to clients.
The best way to do your best with such interview questions is no way but diving deep into a real financial model. You learn to build a financial model from scratch, learn how to input historical data, how to make assumptions and glean data from Capital IQ, Bloomberg to project numbers. What Investment Banks, Private Equity firms and Hedge Funds ask you surrounds DCF modelling, M&A modelling, Trading Comps modelling, Transaction Comps modelling, and LBO modelling.
Not only is it useful for you at an interview with Investment Banking and Buy-side jobs, it also prepares a solid foundation for you to start working at these firms smoothly without feeling overwhelmed in the first days.
Step-by-step to thrive at this type of questions:
- Understand deeply core concepts like PV, FV, WACC, IRR in finance, which are essential to have an overall picture about how finance jobs work
- Learn how to read financial statements (you don’t need to dive deep into details but knowing how to interpret data and what sort of data on financial statements to put in your models is important)
- Develop your own models, walk through DCF, M&A, Trading Comps, Transaction Comps, and LBO.
- Look for interview questions about financial modelling and valuation to practice and rehearse at home or with your peers, or anyone who could give valuable feedback.
5. Buy-Side vs Sell-Side: Which Side are You Going for?
Not all jobs on the Sell-side have the same nature of work. Neither do the Buy-Side jobs.
If you like playing with deals, Investment Banking on the Sell-Side and Private Equity on the Buy-Side would be a good fit. If you are interested in volatility in the public markets and want to go for arbitrage opportunities (for example), you might find yourself suitable for Hedge Fund (Buy-Side), Prop Trading, and Asset Management, etc.
If you still wonder which side you want to work for, you can scroll up and re-walk through key distinctions mentioned above. But, no matter where you work, both sides are prestigious careers, once you set your foot on their doors successfully, you will be the top 1% of outstanding professionals in the financial world.