Sell-Side Advisory Services is a term used in the financial industry to describe the sector that creates and services the many products that are available to the buy-side. This includes the sale of stocks, bonds, foreign exchange, and other financial instruments. The sell-side also includes investment bankers, who are the intermediaries between securities issuers and the investing public.
Understanding How the Sell Side and Buy Side Work Together
The sell-side and buy-side are the driving forces of Wall Street as well as other sectors of the financial industry. Both are necessary in order to conduct business.
On the sell-side advisory services, brokers and executives are motivated to get the highest price for their financial instruments and services. During this process, they provide analysis and advice on everything they sell.
Experienced sell-side advisory services know how to fully research the specific industries and business sectors they have been assigned. They provide regular reports to their firm’s clients that include a set of financial estimates, a price target, and a recommendation as to the stock’s expected performance.
Information is important for those making financial decisions. The more a sell-side analyst knows, the better they are able to convince institutional accounts to direct their trading through the firm’s trading desk.
The buy-side includes professional money managers who run mutual funds, pension funds, hedge funds, and various institutional firms.
Though many Americans understand the stock and bond markets, the foreign exchange market is actually the world’s biggest financial marketplace. Some of the top multinational banks are JPMorgan Chase, Citibank, UBS, and Deutsche Bank.
The bond market is the second biggest financial marketplace in the world, followed by the stock market. Investment banks dominate the sell-side of both the bond and stock market. Among the leaders are Goldman Sachs and Morgan Stanley. They sell to both institutional and individual investors.
One of the most important aspects of sell-side in the stock market is the initial public offering or IPO. Since companies can’t take their stock public by themselves, they hire an investment bank to underwrite the offering and to market and sell shares to investors.
Sell-Side Advisory Services in M&A
Mergers and acquisitions (M&A) are a major portion of the corporate financial world. The term refers to the consolidation of companies or assets via transactions that include mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.
In a merger, two companies are combined to form one. In an acquisition, one company takes over another.
Investment bankers who specialize in M&A pitch their bank’s services to prospective clients, then execute deals for those clients. The client pays the banker to sell the company for the highest possible value. Doing so is good for the banker, too, since their commission is dependent on the selling price.
The process for the sell-side banker typically starts with preparing the teaser document that provides the financials and other highlights of the business. Next, a non-disclosure clause is negotiated in order to obtain further information.
The next steps include preparing a confidentiality information memorandum (CIM), setting the value of the business, receiving non-binding letters of offer, uploading data for potential buyers to study, and arranging meetings with senior management.
Then it’s time to negotiate with the buyer—pushing for the highest valuation possible—and to sign the definitive agreement and provide any further assistance needed during the closing.
To read more about M&A Advisory, check out our blog.
Sell-Side Advisory Services in Trading
In trading, the sell-side players are generally individuals working for investment banks and the firms themselves. They mostly service institutional clients.
The main function is “market-making” and facilitating transactions at the client’s request and timeline. The U.S. Securities and Exchange Commission defines a “market maker” as “a firm that stands ready to buy and sell stock on a regular and continuous basis at a publicly quoted price.” The objective is to make a profit on the bid-offer spread.
A good example of a market maker is a brokerage house that offers to sell and buy opportunities in order to keep financial markets liquid. Though a market maker can be an individual intermediary, most market makers work on behalf of large institutions.
Sell-side traders do research and recommend specific investments in stocks, bonds, and other instruments. They also perform proprietary trading, where they look to make money for their employer. The firm earns a commission for every stock that a sell-side trader buys or sells.
Sell-Side Advisory Services in Private Equity
Financial market experts describe sell-side and buy-side as being two sides of the same coin, where both sides rely on the other to keep markets running and to provide profits.
The buy-side is made up of private equity funds, hedge funds, pension funds, mutual funds, and life insurance companies. The sell-side sells those services.
Making Money in Sell-Side Advisory
Research is a big part of sell-side advisory services. Money is made indirectly, mostly through commissions that are generated when the buy-side trades through the sell-side.
Research provides value by creating ideas and opportunities, which are then relayed to clients on the buy-side. When a trade is finalized, the sell-side is paid via commissions.
Many claim that the sell-side has become less attractive and less lucrative than buy-side. Some experts blame this on increased regulation and fewer IPOs. As a result, banks have been making less money from research. When senior analysts make less money, that trend flows down the chain and affects associates as well.
There is also a trend of fewer advancement opportunities; senior analysts have been staying in their careers for longer while there has been a decrease in the number of positions in the field. This, too, affects the associates’ development, as they often gain experience in the sell-side and then move to the more lucrative buy-side.
Insiders say associates need to accept the fact they will be spending time researching and writing reports, rather than performing what is considered more glamorous roles in the process.
Sell-side analysts also have less desirable hours than their contemporaries on the buy-side. That’s because work on the sell-side can often stretch past normal business hours as associates research and write reports and models. There is also a chance they will get called into work on weekends as major deals come together.
Many people in the business world view sell-side as a stepping stone to buy-side.
Sell-Side Advisory Services in Tech
The tech boom has provided plenty of opportunities on the sell-side. As technology and software companies grow and prosper, they need help in figuring out the best time to cash out to maximize profits or return on investment. Otherwise, a company may need help spinning off a subsidiary or division that is no longer performing well.
The main consideration is to achieve maximum value for a firm. Sell-side advisors are well-versed in what’s going on in the tech world. They consider internal and external factors such as the current market conditions, valuation expectations, how the deal will be structured, and tax implications. Their top goal is to offer a deal that will attract multiple qualified buyers who are willing to pay top prices. That provides leverage for the seller.
One of the important aspects of tech sell-side advising is establishing the “hidden value” of a company that is not reflected by the balance sheet. That value includes things such as the proprietary information contained in the technology, the talent of the workforce, the company’s clients, and its market share. The advisor manages the sale so the company can remain focused on performing its core business function.
Frequently Asked Questions About Sell-Side Advisory Services
What Is Sell-Side?
Sell-side is the portion of the financial market that issues, sells, and trades securities, including stocks, bonds, and other instruments. Examples of sell-side institutions include advisory firms, investment banks, stockbrokers, and corporations.
What Is Buy-Side?
The buy-side is the other side of the market, which buys and invests in securities. This is usually done in large portions, and most often for money and fund management. Examples of buy-side institutions are hedge funds, pension funds, and investment managers.
How Do the Two Work Together?
Both sides rely on the other to keep the markets running and to provide profits.
What Is a Market Maker?
Market makers are a major component of the sell-side. They provide liquidity in the market by buying and selling stock on a regular and continuous basis at a publicly quoted price. They are generally brokerage houses that deal in large volumes of both sales and purchases.
What Are Some Examples of Sell-Side Companies?
Some of the better-known sell-side firms are Goldman Sachs, Citibank, Deutsche Bank, Barclays, and JPMorgan.
What Are Some of the Roles of a Sell-Side Advisor?
Sell-side advisors have several roles, including advising corporate clients on major transactions in stocks, bonds, foreign exchange, and mergers and acquisitions (M&A). Other roles include marketing and selling securities, aiding clients in raising capital such as debt and equity, performing financial modeling and valuation; and conducting research.
For the Sake of Comparison, What Are Some Examples of Buy-Side Roles?
These include managing clients’ money, making investment decisions, recruiting investors and capital to manage, growing assets under management, and conducting research on investment opportunities.
What Are Typical Careers in Sell-Side?
Careers include sales and trading, equity research, and investment, commercial, and corporate banking. More entry-level jobs are available on the sell side than the buy-side.
For Comparison, What Are the Typical Buy-Side Jobs?
Buy-side careers typically involve private equity, hedge funds, venture capital, portfolio management, and wealth management. Many financial professionals eventually move from the sell-side to the buy-side, saying it provides better working conditions and pay. For instance, bank analysts sometimes move to the buy-side after spending a few years honing their skills on the sell-side.
What Are the Skills Needed on the Sell Side?
Many sell-side positions revolve around salesmanship. They may include performing research on specific companies or business sectors, financial modeling, recruiting new clients, making investment pitches, and selling and closing deals.
As a Comparison, What Skills Are Needed on the Buy Side?
The ability to raise capital, perform financial modeling, conduct research, and achieve targeted rates of risk-adjusted return.
What Is the Compensation on the Sell Side?
Salary and bonuses vary depending on the position, experience level, location, and other factors. It is generally understood that buy-side professionals have better compensation packages due to their experience level and the bonus structure of that side of the business.
How Does the Sell-Side Make Money?
Fees and commissions motivate professionals to make as many sales and deals as possible. The market makers buy and sell currencies on the foreign exchange markets, underwrite and manage bond issues, and sell stocks to both individual investors and companies.
Sell-side advisory services are half of the equation needed to keep the financial markets running smoothly and profitably. Sell-side providers assist in the sale of stocks, bonds, foreign exchange, and other financial instruments that are offered to the buy-side. Their job is bolstered by research that helps clients make prudent decisions and maximizes profits for their firm.