The approach of the annual group consulting project (GCP) on the MFin prompts me to think what the differences are between financial analysts who work in investment banks and those who work in consulting firms. There are many shared skills and qualities and in the past quite a few consultants would go to work in equity research (during the boom years of the 1990s in any case). But only a minority were successful, in my experience, even though on paper they should have fitted in well.
I also have friends who work in consulting. So what is the difference?
To outsiders there may be little difference. Both can seem rather over-confident and too inclined to offer an opinion on the basis of limited information. Junior analysts are probably doing similar work in both industries, and working similarly long hours.
At the more senior level, client contact becomes more important in both jobs, as it does in most industries. But I think it is particularly important in finance jobs in areas such as M&A and equity research. Senior equity analysts are more like sales people than analysts, spending a great deal of time “marketing” their ideas to portfolio managers. This is not obvious from the job title and is, I think, the main reason why some consultants didn’t enjoy or flourish in equity research.
I may be wrong but I think finance, even more than consulting, is about putting plausible descriptions and stories together to get clients comfortable with particular courses of action. “Stories” here means narrative – a satisfying context in which a problem and its solution or mitigation can be described and understood. It doesn’t mean fiction i.e. we’re not talking of mis-selling, but of (mostly forgivable) simplification in the face of a daily avalanche of information. People must use simplified stories to make sense of this data. Simplified doesn’t mean simple. I think it was Einstein who said that everything should be made as simple as possible, but no simpler.
Consulting must be partly about this but usually consultants have access to much more information than investment bankers, so there is scope for a more detailed story to be told. That presumably appeals to people who would find the relative lack of hard information in the financial world too difficult to deal with. The fact that so much financial advice goes wrong makes for a relatively forgiving environment because there is always the excuse of inadequate data (this would not apply to due diligence on a takeover though). Perhaps consultants are more perfectionist – I mean this in a positive way. It is remarkable to outsiders how so mnay investment bankers – and equity analysts in particular – can come up with strong views and advice on the basis of seriously incomplete information. But that is what they are paid to do.
The GCP is an exercise in applying students’ learning to an actual client project where they should have more or less enough information (though maybe not enough time) to meet the goal. It contrasts with the equity research project done earlier in the year when students have very little time and information on which to form a view – just like real analysts do. Hopefully, the two projects capture different aspects of applying finance and different commercially useful skills. They also allow students to consider which was more satisfying and where their skills or inclinations fit best, which is a very useful lesson.
I (a management consultant) mostly agree with Simon’s analysis, particularly the part on ‘stories’ (they are also essential in consulting).
However, there are two elements, which I think are fundamentally different between the job of a management consultant vs. the one of an equity analyst: 1) we work on a VARIETY of topics (e.g., operations, human resources, corporate finance, growth-/strategy) and 2) we work TOGETHER (often on the ground) with our clients to solve their problems (i.e., the companies themselves (not the investors) are our clients and they are the ones who pay for our advice and services).
These two elements offer ample learning and development opportunities and are highly appreciated by consultants. I can very well imagine that the ex-consultants who did not enjoy/succeed in equity research missed these elements in the new environment. Also, consultants are generally not the most gifted investors/stock pickers, which might also be a reason 😉
Greetings from Zurich
I think you make two very good points. Equity research, like a lot of activities in finance, is not really a team sport, or at least the teams are very small (and sometimes quite hierarchical, the senior analyst ensuring that the rest of the team acts to promote his or her best interests). And the work is very much centred on a single sector, which means you learn a lot at first but then it can become rather repetitive and boring. I was lucky that my sector for most of my career as an equities analyst was the European utilities industry, mostly electricity. During the 1990s this, perhaps intrinsically rather dull, sector went through enormous amounts of change: privatisation, lots of M&A, restructuring, bankruptcy, regulatory change and a lot of politics. Plus characters such as Jean-Marie Messier at Generale des Eaux/Vivendi. So it remained rather interesting. There are some industries which, having reached a fairly mature stage, don’t really change much from year to year and the process of covering their results can induce a rather dismal sense of deja vu. At the other end of the scale, trying to keep up with the news in technology hardware is a constant struggle.
Hello, I am just visiting this blog, and currently a student at finance mba. I think you have a wonderful blog.
I know that you have to know a lot about business in order to do equity research on top of finance. In my school you can go back and forth from the finance dept. to the mba dept. and I was wondering if you have to take all the mba courses including international business, HR management, operations management, or you only have to take accounting and business strategies.
is it that taking more mba courses will give you more edge in business analysis?
Time is finite so there is a trade-off to be made between learning about finance and learning about business. While MBAs sometimes do have an advantage in equity research, the job is really a multiskilled one (communication is very important for success, for example). You certainly need to be able to understand how industries and businesses work and to have a systematic but not too complicated way of doing this. I use microeconomics, which I think works quite well but learning about strategy is probably a good way too. The value of other MBA standard subjects such as organisational behaviour and marketing is much less, in my view, for doing equity research. Reading a lot of business and corporate history is good too, you see lots of similar situations in history, concerning business success and failure. Ideally a bit of macroeconomics helps too, but it’s not essential.