How to Make a Career Change into Equity Research: The Best Path for Older Candidates?
If you’ve missed the all-important investment banking analyst experience but you still want to work in finance, what do you do?
Go to business school?
Join a Big 4 Firm?
Go to a PE or VC portfolio company and try to move in from there?
We’ve covered options for older candidates before, but an oft-overlooked one is equity research.
If you have the right skills, it may be far easier to move into research as an experienced candidate than it is to get into investment banking or private equity.
That’s because equity research teams aren’t necessarily looking for one specific profile.
Our reader today moved into the industry with an extremely random background – sales, corporate finance, investor relations, and consulting.
But that also gave him many advantages, such as knowledge of the industry he’s covering in research, and the ability to say that research was his plan all along.
Among other points, we cover:
- How to spin your background into sounding focused on a specific industry, even if it was completely random.
- What equity research teams are looking for, and why you might stand a better chance if you have more full-time work experience.
- What to expect in interviews at elite boutiques, bulge brackets, and smaller firms.
- And the future of the industry, given that equity research is undergoing some big changes (as of 2016).
From Random to Research: The Short Version
Q: Can you summarize your story for us?
A: Sure. I went to a non-target university and did a few finance internships, including one at a hedge fund.
But about 6 months into the job, I got a terrible boss who wanted to nit-pick the smallest, most insignificant details, and I started disliking the stuffy corporate environment intensely.
I started networking around and went back to a Big 4 firm that I had spoken with before I took the IR role, and I won an offer in their management consulting team.
They had the impression that since I had worked at a tech company, I was a technical expert in the software and services they implemented for clients (oops!).
But I barely received any work when I started working there, and client engagements dropped by a huge amount, so I was let go. Amazingly, it took them about 8 months.
I networked around some more, and 6 days before my rent was due, I got a phone call from a contact in equity research at a boutique firm.
They needed an Associate, and I needed a paycheck.
I did well in the interviews, won an offer, and then got completely crushed with work for the first 2 months because I had to initiate coverage on 23 companies (!!).
A few months later, the entire firm shut down and started letting people go.
So I interviewed around yet again and won another equity research offer at a European/Asian bank that wanted to expand its presence in the U.S.
I’m the only Associate on the team, and our Analyst is well-respected, with the top hedge funds frequently calling on him for his views on companies.
Q: That’s quite a ride.
So let’s talk about investor relations first – do you think the culture there is generally “stuffy”? Or was it just because you were at a Fortune 500 company?
A: It was because 1) It was a mature, late-stage company, and 2) I hadn’t had real finance experience before joining the team.
Younger tech companies, like Facebook, offer a very different experience because they’re still building their brands among institutional investors, so it’s more about finding growth opportunities and less about reacting to events.
With that said, in IR you are always trying to please multiple constituencies, so there may be more room for politics and mismanagement than in other groups.
Why Equity Research?
Q: OK. So after you left IR and after the consulting gig turned into a disappointment, why did you decide to pursue equity research?
A: I looked at investment banking roles as well, but I felt I was too old for IB and didn’t want to work the hours.
And I had no real investment track record for buy-side roles, so they were also out.
I liked equity research for a few reasons:
- Analysts and Associates are constantly leaving and moving around, and recruiting can be more “off-cycle” than it is in IB.
- You just have to make one person happy in interviews: The Analyst. And you have a better chance of persuading one person to like you than 5-10 people.
- It’s easier to join a growing team in research because teams are smaller and there are more chances to become the second person on a new team.
- Different teams are looking for different qualities. It’s not like investment banking where all teams want people with the same profile (Top school, high grades, multiple internships, leadership/activities, and technical skills).
- I could make most of my previous work experience sound relevant to ER, but it was a stretch to do that for IB roles.
Q: OK. So how did you explain your very random background to research teams?
A: I said, “It was my plan all along, but I didn’t attend a target school, so I had to move in through the side door.”
I explained that I had always been researching stocks, going back to university, but I didn’t go to a school with a presence on Wall Street (because of a specific academic program I wanted to experience), so I had to find another way in.
So I used sales to work my way into a finance-oriented role that involved analyzing companies and talking to investors: Investor Relations.
And then I took the consulting role because I wanted a more granular view of companies, which is essential in research.
I was honest about why I was let go – the downturn in clients and my skills not being what they wanted – and spun the few projects I worked on into sounding like the majority of my time there.
Q: But I’m assuming that people objected by asking why you didn’t move from investor relations directly into research.
A: Yes! And I answered it by saying that to succeed in research, you have to understand not just financials and how investors think about companies, but also how the business models work at a deep level.
And you can do that only by gaining operational experience and understanding the challenges companies go through.
Some people were still skeptical since I had bounced around so much, and this story didn’t work quite as well at elite boutiques and bulge brackets.
Q: But is that what they’re looking for from experienced candidates?
Do research teams care about operational experience at all?
A: The best summary I ever heard was from a Research Director:
“To succeed in equity research, you need a mind like an accountant, the stamina of an athlete, and the mentality of an entrepreneur.”
Stamina is critical because there will be long hours and plenty of grunt work, and acting like an entrepreneur is also critical because you have to publish quickly, get your name out there, and build a reputation.
But different pieces of that description are important at different shops.
At some places, Associates are effectively accountants and focus on data entry and updating models rather than coming up with new ideas.
But at other firms, they’re more macro-focused or relationship-focused.
It comes down to how your Analyst operates: Mine is very relationship-focused and has good ties with management, so he’s on the phone with them all day.
But I’m slower, more methodical, and I like the analytical side more, so I’m a perfect complement to him.
Analysts hire Associates to amplify their game or to compensate for their shortcomings.
To figure out which one your Analyst wants, ask him/her what he/she likes and dislikes most about the job, and pitch yourself as someone who can handle the “disliked” parts the best.
Q: So I guess there’s little consistency in the backgrounds of people who join research teams.
A: Yeah, pretty much. Few people come into ER from IB or IR backgrounds, so I’m a bit of a special case.
Other than that, some have come from corporate finance at normal companies, some are from Big 4 firms, others have come into research straight out of undergrad or MBA programs, and others have even come from data providers like Thomson or FactSet.
The Director at my old firm wanted hard-working people and didn’t care much about their stage of life, degree, etc. He brought in a mix of older and younger candidates, and he hired me partially because of my social skills.
Those skills came from a ton of networking over the years and from breaking into finance from a very unconventional background.
Interviews and Case Studies
Q: So we’ve talked about your story and why ER is potentially a good area for career changers, but what about interviews themselves?
What did you experience?
A: At my first firm, everything was fit-focused. Ninety percent of the questions were some variation of “Why ER?” or “Why did you do Job X before coming here?” or “Are you really sure you want to do ER?”
To prove my interest, I brought in my finance reading list, which immediately made me stand out.
When I started interviewing at other firms, I encountered more case studies at elite boutiques and bulge brackets. They were less common at middle-market firms and European/Asian banks.
The typical case study consisted of a 3-statement modeling test where they sent me a partially complete model for a company in the group’s industry and asked me to finish it.
I was well-prepared from your courses and guides, so nothing caught me off-guard.
Outside the case studies, the questions at the EBs and BBs were still not super-technical.
They did ask a few accounting and valuation questions, but they focused more on my motivation for doing ER, what I thought of different companies, and my stock pitches.
The Future of the Industry
Q: So what do you think of equity research so far?
A: I like it quite a bit – both in my old role and my new one at my current firm.
It’s the first time in years when I’m not just looking for my next thing.
The only part I don’t like is having to be at my desk at 7 AM on weekdays so we can respond to news ASAP.
Other than that, my boss is very loyal, and I could see myself eventually starting a boutique firm with him. I wouldn’t mind moving to a buy-side role eventually, but I would need to mature as a thinker and start covering more stocks independently first.
Q: You’ve made equity research sound very appealing, but isn’t the industry shrinking (as of 2016)?
The whole business model is changing since investors will have to pay for individual reports rather than getting them for free as trading clients.
Doesn’t that make the industry less appealing?
A: The industry is shrinking, but buy-side firms and asset managers are also shrinking.
And those firms are starting to pay a lot more attention to individual Research Analysts to see who’s facilitating profitable trades.
Even though the regulations are changing, I don’t think the industry itself will go away.
Buy-side firms still like to absorb every last detail about companies before they make investment decisions, and a good research team is yet another resource for them.
Good research teams still add value because you pick up very different things from speaking with management in-person and on the phone than you do in investor calls and other reports.
And the better the relationship the Analyst has with management, the more signals he’ll pick up on and use in his recommendations.
Also, the big banks are likely to be harder hit by these regulations and industry changes.
Smaller firms, like elite boutiques, have always survived on the strength of Analysts’ reputations and their creative ideas.
Q: Thanks for explaining that.
Is there anything else you’d add that we haven’t already covered?
A: Don’t underestimate the social barrier to entry.
While the industry has become more diverse, if you’re not from a wealthy/prestigious background, you will not be used to interacting with people who are.
So when you’re first networking for these roles, spend a lot of time just observing what professionals talk about and the vocabulary they use.
And then try to imitate that so you start being seen as “one of them.” It’s easier said than done, but you can always extend your recruiting time frame if you can’t do this right away.
Q: Great. Thanks for your time.
A: I’m happy to help.
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