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Money, Hours, Models, Bottles

Money, Hours, Models, BottlesI’ve seen 2 questions come up repeatedly on message boards, in real-life discussions, and in the comments posted on this site each week…

No, not GPA rounding or degrees and certifications – you know by now that I hate those topics, so you probably haven’t even asked.

I’m talking about why you work so much and why you get paid so much as a banker.

Most explanations focus on the “what”: Are the hours really that bad? (Yes); How much were bonuses last year? (Much higher than what you’d earn working at Best Buy)

But the “why” is even more important – if you don’t understand that, then you’ll always just be a cog in the wheel.

So as Gordon Gekko said to Bud Fox, “Stick around, pal, I’ve still got a lot to teach you.”

The Biggest Myth

The biggest myth is that you get paid a lot because you work a lot.

Wrong, wrong, and triple wrong.

You work a lot as a surgeon, but will you make millions of dollars per year?

You work a lot if you start your own business, but do you think you’ll automatically become a billionaire?

Likewise, you can barely do any work and still make a lot of money – just think about that co-worker who’s always slacking off, or that ridiculously unqualified person they just hired who does nothing.

Why I Hate the Mainstream Media

One time I saw some financier-turned-journalist-turned-something-else writing about why he “worked like a dog” in both finance and journalism but made far more money in finance.

Then he claimed that it was “unfair” because your pay should be proportional to how much you work.

Right about then I wanted to go hunt him down in real life and karate chop him to death.

You hear stories like this all the time – “Wall Street is evil!” “Bankers paid to destroy the world and kill people!” “Wall Street doesn’t deserve the pay!”

Since the outside world hates Wall Street, these stories make for attention-grabbing headlines.

But they’re blatantly wrong, because as Snoop from The Wire might say, “Deserve ain’t got nothing to do with it.”

The Truth

Investment bankers make a lot of money because they earn commissions on huge sums of money, have almost no overhead, and operate in an industry with high barriers to entry.

Whereas a real estate agent might earn 6% on a sale of a $500,000 house ($30,000), an investment bank might earn 1% on the sale of a $500 million company, for a cool $5 million.

While asset management firms and commercial banks also work with huge sums of money, their commissions are far lower – you can’t exactly charge someone 1% for depositing $1 million in cash at an ATM.

And their expenses are much higher – think about how much it costs to run a commercial bank, from the physical branches to the ATMs and credit cards, and compare that to the cost of running a 4-person M&A shop.

Other than office space and travel, banks have few expenses in the same way traditional companies do – so they can afford to pay out 50-60% of their revenue in the form of salaries and bonuses.

Will It Last?

This structure works has persisted because the market for investment banking services is not efficient – it’s dominated by a relatively small number of firms that keep out competitors.

Advising companies may not be expensive in terms of financial capital, but it is extremely expensive in terms of relationship capital – you won’t be advising on deals worth hundreds of millions or billions of dollars unless you have a proven track record over 10-15+ years and know dozens of CEOs and decision-makers.

That’s why new firms can’t just spring up like Groupon clones and copy everything – you would need to be a relatively senior Managing Director at a bank to even think about starting your own firm.

This pay structure will continue into the near future, but there are a bunch of threats that might make finance less lucrative in the distant future – the 2 biggest are:

1) Government Regulation – If governments around the world want to enact a law that says bankers must pay 90% taxes on their income, they can do so. In the 1970s and 1980s, financiers made only 10% more than people in other industries, all because of more restrictive government regulations.

Similar laws could also lead to higher deferred bonuses and bonuses that are mostly stock rather than cash – that has already been happening in Europe.

2) Fee Undercutting – You don’t see this too much in developed markets, but in places like Southeast Asia firms will relentlessly undercut each other and offer lower and lower fees just to win the business of cash-strapped companies.

If you only make $1 million from a deal rather than $5 million, that bonus pie gets a lot smaller.

To learn even more about why investment bankers make so much money, click the link below:

Industries Outside of Investment Banking

“But wait, won’t the fees in private equity and hedge funds also decrease over time? How can 2 and 20 work forever?!”

These firms also make tons of money, for similar reasons – fees on large amounts of money, minimal overhead, and the added bonus of getting to earn 20% of their investment returns.

There is a chance that the current fee structure at private equity firms and hedge funds – 2% management fees on their assets under management and 20% of their investment returns – will decline in the future.

But overall they are safer than banks because they’re less public and an order of magnitude smaller – hundreds of employees at the likes of KKR and Blackstone vs. tens of thousands to hundreds of thousands at bulge bracket banks.

Slashing bonuses wouldn’t have the same dramatic impact if you’re only hurting a few hundred people.

OK, enough with pay – onto hours…

Are the Hours Really THAT Bad?!!

I’m not going to waste your time on that question – if you’ve been reading my emails all along, you already know the answer is “yes” and you know what to expect when you start working.

But why are the hours that bad in the first place?

Can’t banks just hire more people?


The workload is unpredictable and division of labor is impossible, so “hiring more people” doesn’t solve anything.

Think about something else with an unpredictable workload: doing customer support for a web hosting company, for example.

You might not get any customer calls from 8 PM to 11 PM, but then suddenly at 2:15 AM someone’s website will crash and you’ll need to field their call and get it fixed.

That makes customer support expensive, because you need to pay for staff 24/7 – but as long as you properly train someone, he can take the place of anyone else since the set of problems is not that wide.

But in banking you work on deals that last months or years with thousands of files, hundreds of conversations with buyers and sellers, and more – and unless you have intimate knowledge of everything that has happened, you’re useless.

If a client calls you at 2 AM and asks for a number in line 1,207 of an Excel file from 5 months ago, you have to know exactly what they’re asking for.

That’s why banks rarely assign multiple analysts or associates to a single client – if “everyone” is responsible, no one is responsible.

Managing Expectations?

“But wait,” you say, “Why can’t you just manage each client’s expectations and tell them not to expect instant replies at 3 AM?”

Because they’re paying you millions of dollars and they can make you pick up their dry cleaning and cook them dinner if they want.

Bankers are their own worst enemy: since they want to get paid so much, they set expectations and service standards astronomically high – and you, as the analyst or associate, have no choice but to comply and do everything you’re told.

Get the full story and learn exactly why you work so much as a banker – regardless of the economy – right here:

Going back to that point we made in the beginning, you could say that bankers don’t get paid a lot because they work a lot.

Instead, they work a lot because they want to get paid a lot.

The Buy-Side

Your hours can potentially improve on the buy-side – private equity, venture capital, hedge funds, and corporate development – because you don’t have clients.

But at large firms the hours are still bad, and even at small firms if you’re in the middle of a deal you’ll still be working your tail off.

More than anything else, time kills deals – so unless you’re cranking away to get the deal done, the chances of failure are high.

And at mega-funds, you look at so many deals and do so much analysis that it’s like banking all over again – while clients may not be pressuring you constantly, your competitors are.

Every second you delay responding to a deal is a second that one of your competitors can jump in and invest in your place.

So that’s why the hours don’t improve as much as you think they do – you’re still in the business of deals.

Models / Bottles?

Ok, I don’t know how this one relates exactly – I threw it into the title because it sounded catchier than just “Money and Hours.”

Here’s my attempt at making it relevant, though: reading all of the above, you might now be wondering whether or not banking is really for you given the uncertainty over your pay and your life.

I can’t tell you what to do there, but what I can tell you is this: no matter what you do, never end up like this AJ guy from the infamous “Models and Bottles” video:

And please, if you want to “roll up with a hot ride,” at least make sure you bring real models and that you don’t look constipated the entire time you’re at Cain.


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Breaking Into Wall Street

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