Investment banking has changed a lot in the last 5, 10 and 20 years. In a few posts, we will look at how it has changed. For most aspiring bankers, the reasons to become an investment banking analyst were straightforward. The job pays a lot and you can tell your friends. Is investment banking as lucrative or prestigious or lucrative as in its heyday?
The answer is no, for various reasons – and it is partially less prestigious because it is less lucrative.
For a lot of investment bankers that were around on the other side of the interview table when I was recruiting for an entry level analyst position a long time ago entered the industry when it was “the job”. Especially the bankers that started pre-2008, when they started they made more money than any of their peers by several multiples.
Basically, the all-in compensation for a first-year investment banker would dwarf the other A student who ended up as a management trainee at a large corporate or an accountant at Ernst & Young. Accordingly, everyone in business school that knew about investment banking wanted to be an investment banker.
Investment Banking Perks are Down
At the time, banks were also far more liberal with employee perks. Closing dinners were more lavish and orientations and Christmas parties were grandiose. These have been rolled back both from a reputational perspective given the vilification of the industry post-financial crisis and due to greater shareholder scrutiny as investment banks have largely left the partnership structure of law firms, accountancies and consultancies behind.
This is not to say that the perks are not still very good for junior level bankers. In addition to their $35 meal allowances, they are taken to sporting events with clients – all four major North American sports leagues in the US or football, rugby and cricket in commonwealth countries. Client events are a little different in Asia.
In addition, investment bankers across all geographies will have regular internal (team, division, capital markets) and external (hosted by lawyers, the deal site/dataroom providers, financial industry and professional services) drinking events – some with funny themes or activities such as axe throwing, indoor golf and poker games with prizes.
Investment Banking Salaries are Relatively Flat
Although base salaries have risen steadily since that time period, banks have essentially front-loaded salaries and slashed bonuses. All-in compensation has been anemic. While $130,000 is still an exceptional amount of money for a new graduate, the relative attractiveness of the role (and all of the infamous negatives of long hours and tough personalities) has diminished as 1) other finance and management jobs have seen salaries rise steadily whereby they are no longer a fraction of investment banking salaries; and 2) traditional exit opportunities such as private equity roles have opened up entry-level hiring.
For instance, many would be investment bankers are eschewing the recruiting process or jumping ship relatively early into their banking tenure when a pension fund with a private equity arm offers “more interesting work” and shorter hours for what they perceive to be a fair discount in compensation. Is $130,000 more eye-catching than $45,000? Unquestionably. Is $130,000 much more attractive than $105,000 when schedules are far more demanding and uncertain? This is harder to answer.
Technology has Surpassed Investment Banking in the Fight for the Best and Brightest
Investment banking is also no longer “the job” in the same way as it was in the past mostly due to the resurgence of technology after recovering from the dot com crash.
The smartest graduates from the best schools now see the most compelling entry level career starting at Facebook or Google instead of Goldman Sachs and Morgan Stanley. Not only are the salaries equally high with large stock option grants, but tech curries far more favor in the current zeitgeist although they are now being heavily scrutinized for their day in the sun with the recent complications at Uber and Facebook’s privacy concerns with Cambridge Analytica (the most ostentatious company name of all time).
The perks for large tech have far surpassed the investment banking stories of old, although they remain far less debaucherous even with the widely reported “brogrammer” culture. Quality free food, reporting travel time on a connected bus as work time and being able to work on personal projects that could make you a billionaire at work – possibly from your employer buying your company will likely never become staples of the stodgy corporate finance culture of investment banks, even if almost every bank now claims to be a “technology company” in their overblown marketing.
A larger class of students are choosing to eschew the shackles of a corporate life altogether, with many aspiring entrepreneurs taking off before or after graduation with large amounts of seed capital from deal hungry venture capitalists. However, this means that fewer STEM students are choosing finance, but most liberal arts and business candidates are not passionate coders, making more spots available for investment banking. All in all, the average top ranked investment banking analyst is less impressive than the past.
The biggest loser in the investment banks has not been investment banking – but sales and trading and equity research. The culprit – also technology. High frequency trading has made market making unprofitable for high volume and transparent markets such as public equities and foreign exchange, meaning that equity traders can no longer make their spreads and can no longer justify their seats. In addition, other desks have been hammered by punitive regulation charges.
Compensation has fallen off a cliff for many trading floor positions, while many trading floor positions have been eliminated entirely. STEM students have historically been great feeders for capital markets roles, but the leaning out of this space has taken a large percentage of the S&T class out and pushed them into different disciplines.
Is It Still Worth It to Do Investment Banking?
Despite these changes, investment banking remains one of the best careers outside of college with the broadest entry requirements. Anyone with any degree can break into investment banking, although it is an order of magnitude easier with a business degree. Conversely, it is very difficult to get the highest paying job at Palantir without a very specific skillset.
The investment banking recruitment process has also become far more 1) meritocratic and 2) transparent. As public corporates increasingly answer to shareholders that require the best pricing and service, there is less room for nepotism and catering to the old boy’s club of clients and the sons and daughters of important people.
Also, whereas investment banking interview questions and what to expect during the recruiting process were historically passed down from the senior year at investment banker feeder schools, answers and interview guides have become commoditized and widespread on the internet. We have one too.
The industry has also grown as the global economy has grown, but in line with future GDP increases, the bulk of expansionary hiring will be in financial centers servicing emerging markets. This hiring will fall disproportionately into regional hubs such as Singapore, Hong Kong and Beijing. As such, there has never been an easier time to get into investment banking for the average A student.