Is Finance Still a Good Long-Term Career?
Starting this site during the financial crisis of 2007-2009 was interesting.
On the one hand, it was tough – I had no idea if the business would survive.
On the other hand, things were exciting – different banks were failing every day!
Much has changed in the nearly 10 years since then, but one thing has remained the same: We’re still getting panicked emails wondering if the finance industry will survive.
Here’s the latest example from a few days ago:
I am currently at a non-target school, but over the last 12 months, I have been killing myself to transfer to a top university so I can get into IB after graduation.
However, I’ve heard from many bankers that pay will continue to decrease, many jobs will be cut, and that the industry is becoming less and less appealing than it once was.
I’m worried about spending a lot of time to get in, and then finding out that the industry has completely morphed. What do you think?”
The Executive Summary
Here was my response:
“Yes, the overall industry will decline. It won’t go away, but it’s less appealing than it was in 2010 or 2005.
IB may still be worth it for you if you want the access to exit opportunities that you won’t get elsewhere, or if you want to work on deals and advise companies in the long term.
But if you’re doing it because you don’t know what else to do, it’s not worth it – just transfer to a top school and work at Google or Facebook instead.”
If you’re new to this site, you might be wondering why I would say this.
Shouldn’t I be convincing you to do whatever it takes to break in?
Is this a trick to get you to buy my courses and guides?
Reverse psychology to get you addicted?
I’m admitting this truth because:
- I don’t care. I’ve lost interest in promotional activities. I’ve done well enough, and I don’t particularly care about making more money.
- I’m the only one willing to tell you the truth. Most of the other people in this market are so desperate and delusional that they never present the downsides of the careers they cover.
- You don’t care. Even if I said a meteor would destroy the planet if you took a job at a bank, you would still take the job at a bank.
Why the Usual Argument for Finance Has Weakened
The usual argument for getting into finance was the following:
“I’ll gain valuable skills and training, I’ll get exit opportunities, I’ll earn more than I could in any other job, and even if I don’t know what I want to do in the future, I can’t go wrong with banking for an initial career. Plus, I’ll work with smart people and gain a valuable network.”
While this statement is still partially true, each part of it is less true than it was in the past.
And there are new obstacles to getting into the industry:
Factor #1: Valuable Skills and Training
You do gain valuable skills, but there are so many books, courses, and other resources today that you don’t need a job in finance to learn many of these skills.
In fact, you might even learn the technical skills in more depth from books and courses simply because you don’t do that much modeling work on the job, even in more technical groups.
There are some skills you can only learn on the job – how to deal with a difficult client, how to persuade others that your investment thesis is correct, etc. – but there are other ways to develop those skills as well.
For example, if you went into a sales role at a normal company or a tech startup, your skills in these areas would improve.
Factor #2: Access to Exit Opportunities
If you want to work at a mega-fund like KKR or Blackstone, you pretty much have to work at a large bank first.
And even though smaller private equity funds and hedge funds hire candidates with more diverse backgrounds, you still have the best chance of winning offers if you have IB experience.
So this factor still holds up reasonably well, but the problem is that some of these exit opportunities don’t necessarily have great futures.
For example, pension funds, endowments, and 401(k) retirement plans have been allocating far more to index funds and passive mutual funds, and it’s much harder for hedge funds to justify their fees these days.
After a boom in the early 2000’s, fewer hedge funds have been launching each year. This chart from Bloomberg tells the story quite well:
Private equity has fared a bit better, but returns there have been approaching those of the public markets over the past decade.
Many factors explain these trends, but the main one is simple: There’s too much money chasing too few good opportunities.
Active management will never die because the markets will never be completely efficient, but many opportunities will be in smaller niches.
Ironically, investment banking might have better long-term prospects because it’s harder to “automate” M&A deals and transactions in areas like restructuring.
Factor #3: The Money
While you might earn $140K+ as a First-Year investment banking analyst, finance is not the only option for making a lot of money right out of school.
Software engineers on the job for a few years at Facebook or Google earn $150-160K in base salary, and stock awards and bonuses make the total compensation exceed $200K (Source).
And if you don’t want to be a programmer, product managers at these companies earn quite a lot as well.
If you don’t want to do anything related to technology, sales or sales-like roles such as real estate brokerage can also pay in this range if you’re good at the job.
The pay ceiling is lower than the one in finance, but how much does it matter?
Once you’re earning pay in that range, other factors start to matter more.
But if you’re dead-set on making the most amount of money humanly possible without starting your own business, OK, sure, go for finance roles.
Factor #4: The Best and the Brightest… Really?
While many top students still go into finance, more of them now go into other areas.
At HBS, for example, 39% of students went into Financial Services in 2011, but that had fallen to 31% by 2015, while the percentage entering Technology increased from 11% to 20% in that time.
Sure, these are still very high numbers, but finance doesn’t have as much of a monopoly on the best students as it once did.
My anecdotal observation is that we’ve been getting fewer good questions from customers and readers and more silly questions over time.
It seems like more students in the middle of the pack are applying to finance roles, while fewer ones at the top are interested.
And the New Obstacles…
An argument like “I’ll get useful training, earn a lot, and get good exit opportunities!” contains a few implicit assumptions:
- It takes about the same amount of time and effort to win any job or internship, so the one with the best training, pay, and exit opportunities wins.
- These advantages will persist for a long time into the future, and the job/internship itself will still be around.
Both assumptions are questionable, but assumption #1 is more problematic:
New Obstacle #1: You Need More Work Experience, and You Need It Earlier
Since you need a sequence of previous finance internships to have a shot at IB summer internships, it takes far more effort to get in, even if you’re at a top school.
Also, recruiting starts insanely early – undergraduate IB internship interviews, for example, now start a year in advance of summer internships.
Those factors mean that you need to start much earlier and commit to finance in your first year or early in your second year of university.
At the MBA level, you often need a pre-MBA internship or some work experience that’s closely related to deals: Contrary to what these programs tell you, you won’t have time to “re-invent yourself” on campus.
And as a mid-career professional, your chances aren’t great unless you’ve been working in a role that involves “transactions” of some sort.
New Obstacle #2: Will You Get Automated?
Despite all the hoopla over automation and robots taking jobs, I’m not too convinced that traditional investment banking is at risk.
Smaller and plain-vanilla deals lend themselves to automation, but once you get past a certain size and complexity, company executives need a banker to run the process.
Automation is more likely to make an impact in areas like retail banking, mutual funds, trading, and anything that’s not dependent on human relationships.
Think about this way: If you look at one of the most time-consuming tasks for IB Analysts – “spreading comps,” AKA finding financial information for companies – there are many tools, such as Capital IQ and FactSet, that automate the process.
But few banks rely on them because the process requires human judgment: Should you add back that non-recurring charge?
You might have to read the footnotes to tell, and it’s extremely difficult for computers to interpret that type of language.
If Not Finance, Then What?
This one comes down to why you want to get in.
Not what you say in an interview, but your real reasons.
Reason #1: You Don’t Know What You Want to Do, But You Want to Earn a High Income
I would recommend going to Google, Facebook, Microsoft, or another large tech company and working in an engineering or product management role if this is you.
If these companies don’t recruit at your school, transfer to a better school or work at a smaller company.
You can still earn six-figure compensation in these roles, and the work environment and hours are better.
Yes, the pay ceiling is lower, but once you’ve repaid your student loans and saved up a good amount, you’ll probably stop caring.
Reason #2: You Want the Training and Skill Set
Two words: Self-study.
Yes, you need to be self-motivated to learn the skills this way. If you need someone to tell you what to do 24/7, you’ll never get anywhere.
But if you’re not self-motivated, you won’t make it into the finance industry either.
Reason #3: You Want the Exit Opportunities
You need to take an honest look at your goals and see if banking is necessary.
For example, if you want to work in corporate finance at a normal company, IB isn’t necessary: Apply to a rotational program and move in from there.
If you want to work in a hedge fund/asset management role, IB is also less essential because it has little to do with what you do on the job.
You can also go the CFA-and-internship route and bypass IB altogether, especially if you want to work at a fund type that has nothing to do with corporate valuation (e.g., global macro).
Reason #4: You’re a Mid-Career Professional and You Just Want to Make More Money
Rather than killing yourself trying to get into IB, you should focus on building a side business or doing freelance consulting.
You don’t need to “start a company”: Start casually and see what clients are willing to pay for.
If you’re dead-set on finance, take a look at this article for alternate paths into the industry for older candidates.
Reason #5: You Like the Work and You Want to Advise Companies
And now we arrive at the one good reason to get into the industry.
If you’ve done multiple internships and you’ve concluded that you want to be a banker in the long-term, great.
My only tip is to move to an elite boutique sooner rather than later since the bulge brackets don’t exactly have a bright future.
Compensation is down, cash compensation is way down, and new regulations make it tougher for the large banks to conduct business.
And if you’re on the sales & trading side, go to a prop trading firm, at least if you want to be a trader in the long term.
Will the Industry Completely Morph?
Going back to that panicked reader email, he’s right that it’s harder to justify the time and risk it takes to get into the finance industry.
But the real problems, at least for the roles we focus on, are less about automation and more about the extra effort, early recruiting, and the future of certain exit opportunities.
If your goal is to earn a high salary and enjoy life, join a big tech company.
If you just want to learn the skills, take a class.
And if you want to make more money, start a side business.
If you like the work or you need banking for specific opportunities, then it might make sense – even if it takes a massive uphill battle to get in.
What motivates you to get into or advance within this industry?
Are there downsides to the non-finance paths that I haven’t considered?
Or are there upsides to finance careers that I’ve missed?
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