Before we knew any better, we were at a wine and cheese in our undergraduate years to pillage extravagant free food at the information sessions and club events. From time to time we would run into someone from a major asset manager or corporate and they would try to do their bit to give back by starting a conversation with awkward millennials. Possibly dating ourselves here, but here are some excerpts from the times:
- “So, for someone outside of the industry, it’s difficult to describe what buy side and sell side are.”
- “People are really worried about Greece and possible contagion.”
- “We didn’t lay any people off last year because we were conservatively positioned, but my friends on the sell side said that a good bonus was zero and a bad bonus was you’re fired.”
- “Assets are fairly expensive right now, we feel like the easy gains have been snapped up already.” (actually, we heard this last week again)
No one in our circle really cared, we were just there for foie gras and better alcohol than campus beer – but someone’s curiosity was piqued and in the innocence of youth, they committed a most uncouth faux pas.
“So, do you make a lot of money in investment banking?”
“Well you do. If you get an analyst job out of school in New York, you will make a million dollars before you’re 30, but asset management is actually much more interesting… and I like my job because… alpha… intellectual curiosity… biking to work at 5AM… kids…”
Nobody paid any attention after you will make a million dollars before you’re 30. The next day everyone in the circle was reading Mergers & Inquisitions and pretending they knew something about the proposed merger between AT&T and T-Mobile.
So now that we have been there, done that, we are somewhat qualified to give our take on the matter. Executive summary: for a junior banker, yes, but they are not necessarily “rich”.
Investment Banking Analyst Case Studies
In our analyst class, we met a large number of bankers and traders (by traders, we are lumping everyone from sales, trading and structuring together because new hires do not get to hold any meaningful risk), most of whom are no longer bankers or traders. Four of our entering class constituted a representative sample of the whole. There was also a fifth banker class which came from money, but they are not relevant to this example.
Investment Banking Analyst A
- Immediately bought a one bedroom apartment1 with help from parents and favorable mortgage rates from being employed at a major financial institution
- Grinded very hard and expensed practically every meal
- Cooked when there was free time
- Had a steady accountant girlfriend (charged her rent)
- Pre-drank with cheap alcohol before going out and never got bottle service
- Plowed non-mortgage payments into index funds and bitcoin
Analyst A saved up around $10-$20k of his base salary every year and banked/invested his entire bonus. He left investment banking with considerably more than $1 million dollars in net worth and now works in Private Equity/Hedge Fund.
Investment Banking Analyst B
- Came from lower middle class background from a Tier 2 city
- Watched American Psycho
- Enjoyed art, shows and fine dining
- In driving cities, possible entry level luxury car purchase2
- Took nice vacations that were not cancelled by his MD at the last minute
- Went to cocktail bars and purchased fine whiskies for personal consumption
- Dated other professionals
Analyst B spent all of his base salary throughout the year and had around $5-10k of credit card debt that was paid off by his bonus. A significant part of the bonus went into luxury goods for himself and the rest was banked. He was promoted and continues to climb the ladder in investment banking – usually comfortable net worth for his age.
Investment Banking Analyst C
- Aggressive dating across the social spectrum
- Large ticket purchases
Analyst C spent well beyond his base salary and most of the bonus was used to fund extravagant purchases. No promotion – works in corporate finance at a Fortune 500.
Trading Analyst D
- Got off work at 5 or 6 on a regular basis
- Started drinking at 6:30 on a regular basis
- Has his own book now as a trader on a desk
- Much lower bonus than investment banking peers, albeit better hours
He saved no money during his analyst years, using his bonus to pay down his credit card debt. More burnt out from the lifestyle now and has a more fixed schedule and starting to accumulate wealth quickly in more senior role, but with minimal net worth as of right now.
The variance is large, and working in finance undoubtedly pays well – after all, what 22-year old makes $150,000 out of college outside of major technology companies or professional sports – but may not make someone rich.
A Million Dollars Is Not That Much Money
A million dollars has always been a major psychological milestone – however, the value of a million dollars has eroded significantly due to inflation. Today, a million dollars does not buy you a house in Vancouver.
A million dollars is no longer a reasonable benchmark for being financially healthy – a large percentage of homeowners are millionaires through appreciating real estate. $2.5 million dollars for net worth is probably the equivalent number today, or $1 million liquid with home ownership and an additional investment property.
Gross Revenue is High, Net Revenue is Not
Ostensibly, $150,000 is a lot of money – and if all of it was pocketed, it would certainly get a young professional on the right track in accumulating wealth. The problem is that very little of that $150,000 is realized.
Major financial centres such as New York, London, Los Angeles and Toronto have prohibitive tax rates and exorbitant rents (in addition to other fixed charges such as internet/hydro/electricity/heating). In some jurisdictions, variable compensation is taxed at an even higher rate.
Together, these can already lop off 40-60% of the headline figure, leaving an analyst with around $75,000. Depending on how nice the apartment is, this can vary. In New York or San Francisco, it is impractical to live without a roommate because rents are too high relative to income.
$75,000 is still very good in terms of saving for a 22-year old – however, most analysts get nowhere close because they do have time outside of the office that they spend liberally given that big cities have a lot to offer.
Despite eating off the company dime for 6/7 days of the week, dinners outside of working hours tend to be bigger ticket items at the numerous renowned restaurants across the world’s megacities. Whether for dates or meetings with friends, food costs stack up quickly.
Alcohol usually turns out to be a much more expensive outlay than food. Watering holes that cater to bankers are in close proximity and people end up forking out $10-$15 per beverage when they were paying 1/8th of that in college. After 10 or so drinks, this accumulates to a tab over $100. Clubbing and bottle service is an extension of that.
For a lot of new hires that come from middle class or working class backgrounds, there is a psychological effect that is similar to that of lottery winners – never has so much money been assessible and there is a feeling that money cannot run out. A new analyst may make more than his dad ever did in his first year, but in a city like New York, money runs out very fast. A new TV and new Ferragamo gear will accelerate this process.
Banking analysts in Calgary, Houston, Charlotte, Minneapolis, and Chicago (to some extent) tend to save materially more money due to much lower effective tax rates and cost of living. The catch is that these cities are more difficult to lateral out of and have less to do from a lifestyle perspective.
In conclusion, investment bankers do make a lot of money – however, the reality is that 50% of junior bankers do not actually get “rich” and 75% are no richer than someone who starts at Deloitte and is frugal with expenses. This is not to say that investment banking is not a better career selection as a new entrant to the workforce given the intangible benefits and future earnings potential either from climbing the ladder or via lucrative exit opportunities, but visions of having half a million dollars before the analyst stint is over is wishful thinking.
1 With help from parents and favorable mortgage rates from being employed at a major financial institution.
2 Driving cities include Houston, Los Angeles, Calgary. We know people who bought new Porsches instead of entry level luxury cars with their bonuses – not a good idea.