What it means
The split describes who carries the investment risk. Buy side firms end up holding the asset and live with the result, while sell side firms make their money on the flow of transactions and the advice around them.
That single difference explains almost every commercial and cultural contrast between the two. Buy side revenue is usually a percentage of the money under management, sometimes with a share of the profits on top.
A manager with $800,000,000 under management charging 1% collects $8,000,000 a year whether markets rise or fall, which is why gathering assets matters so much to these firms. Performance fees add upside but also make revenue swing with results.
The work itself is slow and selective. An analyst may follow thirty companies and act on three ideas a year, because the measure of success is the return on the portfolio rather than the number of recommendations published.
Research is produced for internal use and is rarely shared outside the firm. In mergers and acquisitions the phrase shifts meaning slightly.
Buy side advisory means acting for the acquirer by finding targets, valuing them and negotiating price, as opposed to sell side advisory which runs a sale process for an owner. A corporate development team inside a trading company is effectively an in-house buy side function.
For anyone outside finance, knowing which side a person sits on tells you how to read what they say. A sell side analyst's note is partly a marketing document for the bank's clients and tends towards optimism, while a buy side view is private and usually more sceptical.
Neither is dishonest, they simply answer to different incentives. Regulation treats the two differently as well, with buy side firms owing a duty of care to the clients whose money they manage.
That duty shapes how they document decisions, allocate trades between accounts and disclose costs.
In practice
Real-world examples.
Example
A life insurer's investment team holds $4,000,000,000 of corporate bonds to match the payments it owes policyholders for the next thirty years. It is a classic buy side investor: it cares about whether each bond pays, not about trading it, and it may hold a single issue to maturity.
Example
A manufacturing group's corporate development director is running a buy side process to acquire a smaller competitor. She builds the valuation model, sets a walk-away price of $46,000,000 and instructs the advisers, which is the same role a fund manager plays when buying shares.
Example
A graduate chooses between a research job at a broker and an analyst job at a fund. The broker role means publishing notes for clients and being measured on how useful those clients find them, while the fund role means owning positions and being measured on the money they make or lose.
Formula
Calculation
Buy side fee revenue = (assets under management x management fee rate) + (return above the agreed hurdle x performance fee rate)
A mid-sized manager runs $800,000,000 for pension clients at a management fee of 1%, so base revenue is 800,000,000 x 0.01 = $8,000,000. The portfolio returns 12% for the year against an agreed hurdle of 6%, so the excess is 6% of $800,000,000, which is $48,000,000. A performance fee of 10% on that excess adds 48,000,000 x 0.10 = $4,800,000, giving total revenue of 8,000,000 + 4,800,000 = $12,800,000. The clients keep 48,000,000 - 4,800,000 = $43,200,000 of the excess return, and in a flat year the manager would have collected the $8,000,000 base fee only.Case study
Seen in the real world.
Ravensmoor Pension Trust is an illustrative, fictional scheme with $1,200,000,000 of assets. For years it relied heavily on sell side research when choosing corporate bonds, and its trustees grew uncomfortable that the same banks selling the bonds were also recommending them.
The trust built a small internal credit team of three analysts at a cost of about $900,000 a year. The team ignored broker recommendations on new issues and instead priced each bond against the scheme's own liabilities, declining roughly a third of the deals the scheme would previously have bought.
Two years later the scheme's credit losses were materially lower than its peer group, and the trustees could show exactly who had taken each decision and why. The illustrative lesson is that becoming a genuine buy side investor is less about size than about owning the analysis behind each holding.
Watch out
Common mistakes.
- Using buy side and sell side as labels for whether someone is currently buying or selling, when they describe the kind of firm a person works for.
- Reading a sell side research note as neutral advice, when it is written for the bank's clients and sits alongside a business that earns fees from transactions.
- Assuming buy side firms always pay less than sell side ones, when a share of performance fees at a successful fund can far exceed any banking salary.
Questions
People also ask.
Does the buy side include private equity and venture capital?
Yes, any firm that invests its own or its clients' capital and holds the resulting stake is on the buy side, whether the assets are listed shares or private companies.
Who pays for sell side research if it is given away?
It is paid for indirectly through dealing commissions and, in several jurisdictions, through explicit research budgets that managers must now disclose to their clients.
Is a corporate treasury a buy side investor?
In effect yes, when it is deciding where to place surplus cash, because it carries the credit and interest rate risk of whatever it buys.
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