Yes, as a start-up trying to help students break into the investment industry, we admit we’re a bit biased with this article’s title. But it’s purposely done. That’s because in our experience, the majority of students we come across only want to be investment bankers (and usually just at Goldman Sachs!). But that’s a shame because such a mindset means you’re not exploring the breadth of opportunities in the finance sector. So in this article we’ll give our three reasons why you should consider investment management over investment banking.
But why do so many students want to enter investment banking in the first place? The two most common things you’ll hear are exit opportunities and pay. On exit opportunities, the dream is to eventually switch careers and enter private equity or join a hedge fund, and that apparently justifies the 2-4 years of rigorous investment banking work beforehand.
Private equity is more of the same: 80-100 hour work weeks, sourcing and closing deals, and so on. And if that’s what you want to do long-term, then fair enough. But the funny thing about hedge fund exit opportunities is that hedge funds are a big part of the investment management industry. So if your dream is to eventually join a hedge fund, why not start in the investment management industry in the first place?
Also, all of this dreaming about exit opportunities but what about entry opportunities? In investment banking, you have tens of thousands of candidates applying to a select few banks. In investment management, you have lots of different firms – from asset managers to pension funds and family offices – with many different roles available.
What about pay, the second most common thing why so many people want to enter investment banking? That takes us to our first reason of why you should consider investment management over investment banking.
Before we start, answer this question: which industry do you think pays more, investment banking or investment management? You probably said investment banking. So let’s look at some numbers. Let’s say you’re in investment banking, what’s the highest position you can reach? Vice President? Managing Director? Here are some figures from the Corporate Finance Institute.
Source: Corporate Finance Institute
MDs are on top of the hierarchy and the very best and most senior ones can earn up to $10 million. But let’s take it a step further. What’s an even higher position than MD? How about being the CEO of an investment bank. Not just any bank, but Goldman Sachs.
Lloyd Blankfein made around $23 million in his last year as CEO of Goldman Sachs in 2018. Not too shabby. Now, what’s the highest position you can reach in the investment management industry? Many will tell you that it’s managing a very large and successful hedge fund. So let’s look at some of the highest-paid hedge fund managers in 2018.
$1.6 billion, $1.2 billion, $870 million, and the list goes on and on. Fast forward one year to 2019, and the top 15 hedge fund managers collectively made $12 billion in total compensation. That’s more than JP Morgan paid all 56,000 of its investment banking employees!
But let’s face it: the odds of one of us becoming the next CEO of Goldman Sachs or a top hedge fund manager are quite slim. So let’s be more realistic and look at average pay at investment banks and hedge funds.
Average pay at investment banks has historically been higher than at investment managers. But investment banking compensation has been falling since the global financial crisis, and the pay gap between investment banking and investment management has shrunk considerably over the past decade.
Hedge fund average paySource: Mergers & Inquisitions
Investment bank average pay
Source: Mergers & Inquisitions
The tables above show compensation at a hedge fund vs. a top-tier investment bank according to level of experience. The key takeaway, and this holds true for the industry overall, is that pay is initially higher at an investment bank but after 3 years or so on the job, the pay becomes better in investment management. But even when you’re a junior at each and you’re compensated more at an investment bank, it’s not an entirely fair comparison. Why? Because you have to adjust for the hours worked! So let’s do that for fun.
As you can see, the average compensation per hour is 20% higher in investment management. Putting aside the pay, think about all the things you can do with the extra hours you have per day. The difference between 100 hours a week and 60 hours a week is roughly 6 extra hours per day, 7 days a week. Go to the gym? Learn salsa dancing? Become a superstar DJ? You name it. And talking about 100 vs. 60 hour work weeks is a nice leeway to our second reason of why you should consider investment management over investment banking: the nature of the work.
We acknowledge we’re a bit biased here but we genuinely do believe the nature of the work in investment management is better. In investment management, you’ll be doing a ton of interesting research and trying to uncover good investment ideas from the start. For example, when I (Reda) was an equity analyst at Fidelity, at one point I was covering the North American energy sector. And twice a year I’d go to this random place in the middle of the dessert in Texas where I would meet with shale oil companies and do tours of drilling and fracking sites. This is a picture of me on a drilling site.
Outside of equities or credit research, no matter what you’re doing – commodities, fixed income, if you’re a trader or an analyst – no two days are the same in the financial markets and the work itself is really interesting and intellectually stimulating. In investment banking, talk to any first or second year analyst and they’ll tell you that their days are mostly spent on PowerPoint, putting together pitch books, with some repetitive and grunt modelling work on Excel.
Regarding the hours, investment banking is well known for its notorious 100 hour work weeks. That involves a lot of late nights and a lot of weekends spent working. Also, it’s quite common to get an email from your boss at midnight assigning you with a project that’s due at 9am the next day. In investment management, the hours are a lot more reasonable and average 50-60 hours a week. You also have most of your weekends free of work.
In investment management, you get a lot of work autonomy and responsibility early on. If you’re in equities or credit, during your first year you’ll get to speak directly to CEOs and CFOs of the companies you invest in. And regardless of asset class, you’ll work early on with portfolio managers, providing key inputs and opinions into investment decisions with millions of dollars at stake. In investment banking, it’s the more senior bankers who are sourcing deals, talking to clients, and executing deals. Juniors, on the other hand, do all the admin work necessary in the deal process such as putting together presentations and building Excel models. Also, stories of fetching coffee and lunch for seniors are not uncommon…
You basically have to do what your superiors tell you to do and that brings us to our last point, which is organisational structure. In investment management, it’s quite flat. Analysts, quants, and traders all work and collaborate together and no one is really above the other. And they all work directly with portfolio managers as partners in the investment process as opposed to portfolio managers being bosses who you have to take orders from. Investment banks follow a strict hierarchical order: 1st year analyst, 2nd year analyst, 1st year associate, and so on; eventually vice president, MD, etc. In each instance, you have to answer and take orders from people who are one notch above you in the hierarchy.
Our third and final reason why you should consider investment management over investment banking is their respective industry outlooks.
There’s been a flurry of new regulations implemented after the global financial crisis to reign in investment banks and eliminate “too big to fail” (not surprising considering the role banks played during the crisis). The consequence of all these regulations is that it’s negatively impacting investment banks’ financial performance: it’s restricting their revenue-generating potential, putting a strain on their cost structure, and reducing the returns of their different business lines. How are banks responding to this pressure? By reducing their workforces. In fact, in 2019 alone, investment banks cut more than 75,000 jobs globally!
As for the investment management industry, the sector has a brighter outlook despite the rise of passive investing. Passive (or index) investing is a cheaper alternative to traditional active management which is what the bulk of investment firms do. This leads to fee pressure and therefore revenue pressure for investment firms. They’re responding to that by cutting costs but unlike investment banks, it’s not through massive job cuts, but through things such as technology, increasing scale in fund marketing and distribution, downgrading travel perks, and industry consolidation.
The last and important thing to note about this is that passive investing is still a function within the investment management industry. And it’s leading to cannibalisation of other functions within the industry, namely: active investing. So think about it as one area being pressured but another booming, and that boom creates plenty of other job opportunities.
While there have been some job cuts in the investment management industry, they’re nothing of the scale of investment banks and are mainly in middle or back office roles. So far, front office roles such as research analysts, quants, and portfolio managers have been relatively untouched. Also, another way investment firms are trying to be more cost efficient is by spending less on sell-side research after MiFID II was introduced in 2018.
MiFID II is a set of EU-wide regulation that unbundled research from trading fees. Previously, investment firms received research from investment banks technically for free but in reality it was in exchange for trading through that investment bank. MiFID II banned that, and now investment firms have to budget separately for research and for trading, and this is what is referred to as unbundling. What this means in practice is that investment firms now have to pay for research from their own pockets. As a response to that, they’re using a lot less research and are trying to move more of their research in-house. This means more job opportunities for research analysts at investment firms and away from investment banks.
On the topic of job opportunities, there’s also an increasing number of these in growing areas such as ESG (Environmental, Social, and Governance) and SRI (Socially Responsible Investing). Back at Fidelity, we launched a dedicated ESG team in around 2017 and it’s been doubling in size every year since then.
Lastly, investment management firms are hit less hard during financial crises. During the 2008 financial crisis, we all know the stories of huge investment banks going bust or requiring bail-outs. Investment management firms, who mostly take a percentage out of assets under management, are usually a lot more resilient during times of crises.
There you have it. We’ve hopefully convinced you to not limit your options just to investment banking, but to really consider investment management as well. To learn more about the industry, check out the rest of our articles and website.
Reda & Stephane