The portrayal of the famous Hollywood Finance villain Gordon Gecko, in the 1987 movie Wall Street won Michael Douglas the Oscar for Best Actor.
“Greed is good.” declared Gecko. Investment bankers are perceived to personify this greed, due in no small part to the image of the industry perpetuated by the media and popular culture.
Joris Luyendijk in his book Swimming with Sharks wasn’t far off the mark when he said, “Investment banking is a trap, a game and an addiction. The reward is big, but uncertain, which makes it exciting and keeps you coming back for more.”
For the uninitiated: What is investment banking?
Investment bankers are essentially financial advisors for corporations and the government. Instead of advising individual investors, investment bankers provide financial advisory services including helping clients raise money in the capital markets (which include the stock market and the bond market) and assisting with mergers and acquisitions. For example, investment bankers may help clients through bond financing (issuing bonds to raise money) or equity financing (assist with an IPO – Initial Public Offering).
The lifestyle, glamour and risk associated with big financial deals extend a psychological attraction that few achievers can resist. Indeed, careers in this field were so popular until 2008, that almost half of the MBAs from elite business schools went on to a career in financial services.
The MBA shift away from investment banking
There was quite a turnaround post the global financial crisis: the percentage of MBAs entering investment banking nearly halved between 2008 and 2015.
According to Bloomberg, only 4% of fresh Harvard MBAs in 2015 sought a career in investment banking.
The reasons for this slow spiral away from investment banking are multi-pronged.
Aftermath of crisis: At the fore are the stringent regulations in place after the bust, such as Dodd-Frank and its Volcker Rule, which have reduced trading profits. In the first quarter of 2016, CNN Money reported that Goldman Sach’s revenue fell by 40% and due to the bonus-led model, pay also fell by 40%. The Financial Times reported bonuses across the industry are down 10%. Median salaries for an associate in investment banking ($117,596) are now quite in line with consulting and other traditional MBA choices. The shutting down of large investment banks also decreased the number of positions in the field, and made getting to these more competitive than ever.
Greater variety of career choices: Research shows that investment banking jobs are now relegated to second-most sought after, after consulting. Investment banking has also lost MBAs to more trendy industries such as technology, and to the now more lucrative careers in private equity and hedge funds.
Shift in hiring policy: There is a shift in hiring policy too; firms increasingly prefer undergraduates. There are a greater number of investment banking internships on offer that serve as ‘feeders’ to the investment banking analyst and associate positions. Research from High Fliers shows that in 2015, investment banks were the biggest recruiters of interns in the UK. These internships target the best undergraduate candidates, as competition for them is fierce. Undergraduates are more motivated to prove themselves, and have lesser family commitments. They stay put for a long time, despite gruelling hours.
Undergraduates in investment banking
Even as MBAs seem keen to explore other opportunities, undergraduates have stepped up to fill the analyst and associate positions. The Financial Times reported that the number of applications from undergraduate students has risen more than 40% since 2012.
Interestingly, the popularity of investment banking is on the rise amongst the young and ambitious; Bloomberg reported that almost 25% of undergraduates surveyed in 2014 were pursuing an internship in investment banking, twice those interning in consulting. Deutsche bank is reported to have seen a 14% increase in intern applications globally. While they have also hired 9% more interns than a year ago, these positions are as competitive as the decreasing share of positions for MBA recruits. More than 15,000 applications were received by the Goldman Sachs summer internship program, and the 2% acceptance rate makes it more competitive than Harvard Business School.
How important is an MBA for a career in investment banking?
As the investment banking analyst positions get flooded with undergraduate applications, what edge does an MBA-armed associate have in the field? After all, with tuition debts at an all-time high, MBAs are looking to recoup more than $100,000 a year in the US.
Even as business cycles contract and expand, the world changes and the investment banking industry matures, the answer remains the same: for progress in core IB profiles an MBA is essential.
The nature of competition may have evolved, but the degree of competitiveness in the industry stays constant. The root of the answer lies not only in the specialized degree that is the MBA, but the consequences of it. And it is not as simple as the work experience required for a top-tier MBA.
Investment banking careers are highly standardized, and the MBA degree bestows requisite skills and recognizable baseline knowledge of core business processes. The high-pressure academic program ensures that candidates learn how to deal with stress and long work hours. They also have access to a wide variety of networking opportunities. They are pre-screened and approved by the leaders in business.
This is well-known, but here is a point of note: B-schools select MBA candidates not only based on the quantity of their experience, but also the diversity of their work experience.
Investment firms globally are starting to focus on core needs of clients, dropping business styles to a more boutique-style approach to financial advice. A snapshot of the backgrounds of analysts reveals spectacular breadth and range of experience. From coal mining to a laundry service start-up and from car racing to sustainable farming; the underlying theme is exposure to a wide variety of core processes and industries. MBA recruiters at global banks, including Goldman Sachs, insist that financial experience is not a pre-requisite to getting hired.
The MBA is a demonstration of leadership skills and strong work ethic, and MBA courses from a tier-one university is the commitment to development for the long haul. As compared to undergraduate career choices, employers feel a career decision made after an MBA is more likely to be mature and well thought-out.
Greed is very good
Even as these highly competitive jobs require over 100 brutal hours of work, the benefits go much beyond remuneration. Maybe it is time to learn the full lessons of the greed is good ideology. This field of achievers is a true meritocracy; every citizen values working with distinguished leaders. Each employee epitomizes a passion for business, but more importantly, a very strong, incorrigible zest for the best things in life.
Perhaps it was thus inevitable that the glitzy world of investment banking slowly regains its sheen. The Financial Times reported that between 2012- 2016, MBA applications in investment banking rose by 15%. As ever, it holds vast opportunities for the best in the business to prove themselves.
