Investment banking careers are limited-term careers

Career as a trader in investment banking

Jobs in the financial world have changed massively in recent years. Here you can find out which career you can pursue as a trader in investment banking and how high your income will be.

Hot sleighs, huge villas, extraordinary lifestyle! The life of an investment banker in the past decade has been something paradisiacal! Although the industry was shaken by crises and scandals at regular intervals, one component always remained attractive: the bonus!

 

Even today, around 10,000 young professionals apply for a single position at a renowned investment bank. The reasons for this are quickly outlined:

  • "Looks good on the résumé"
  • Prestige and image
  • Earning opportunities

Merit? Really? Yes, what do you earn today as a young professional in the world of investment bankers?

 

Before I give you the specific figures, I can anticipate that the industry has been severely restructured since the financial crisis, both in terms of areas of responsibility and payments.

The main reason for these changes is not the lessons from the financial crisis or a cap on bonuses, but the advancement of technology. If you have ever dealt more intensively with algo trading or flash traders, you can now also guess why the bonuses in investment banking have been reduced by around 80% compared to the 2000s.

Traders who work for investment banks usually have the choice between propriety trading or market-making. The former can still be described as exciting, as there is trading for the bank's own "profit". With market making, you have to appear in the office at 6:00 am, but you don't do anything other than follow algorithms and "match".

 

But what options are there to become a professional trader? In this article, we'll stick with the investment banks for now.

As mentioned above, I have studied the salary issue and collected data from leading U.S. investment banks and hedge funds as opposed to them. The following table lists the typical career paths in an investment bank and then as a comparison of a hedge fund.

  • Financial analyst - 10,000 applications (global) for a position as a trader. Base salary approx. 60,000 - 65,000 USD, bonus approx. 5,000 - 10,000 USD, no share participation, fixed-term contract for 2-3 years
  • Associate - Open-ended, basic salary 120,000 - 140,000 USD, bonus 70,000 - 150,000 USD, of which approx. 20% in shares with a blocking period of 5 years, prior departure eliminates the bonus, job as an associate approx. 3-5 years
  • Vice President / Executive Director - Base salary 250,000 - 350,000 USD, bonus 125,000 - 200,000 USD, of which approx. 20% in share participation with a blocking period of 5 years, previous departure eliminates the bonus, most employees remain in one of these positions, VP earns more than ED
  • Junior Managing Director- Base salary 450,000 - 500,000 USD, bonus 300,000 - 350,000 USD, of which 25% equity participation with a 5-year vesting period, previous withdrawal eliminates bonus
  • Senior Managing Director / Partner - Base salary 750,000 - 850,000 USD, bonus 1,500,000 - 2,000,000 USD, of which 35% equity participation with a 5-year vesting period, previous withdrawal eliminates bonus

 

These numbers should give you an initial overview. However, you shouldn't be blinded by the nice numbers. Because what most of them completely neglect are job security, cost of living and development opportunities.

For many, job security is an important factor when choosing an employer. Particularly in investment banking, but also in the American job culture, there is a very high fluctuation.

When a bank gets into trouble, be it through its own fault or through a financial crisis, the investment banking staff are usually the first to be affected by job cuts and other restructuring measures. In such cases, the nice bonus from the blocking period is history.

If we now look again at the first position on the career ladder, one really has to ask oneself whether 60,000 USD (financial analyst) is enough for a living.

You're probably wondering what world I live in, after all, 60,000 USD is a lot of money ..

That is absolutely correct. However, the salary is only as good as the costs. And if you want to take up a job in a well-known investment bank, your daily career will not take you along country roads to Radevormwald, but rather to the City of London, Manhattan or Frankfurt!

Why is that relevant? Quite simply because you have to pay enormous rents in these metropolises and the cost of living is generally at a much higher level. Moving to the supposedly cheaper suburbs is also out of the question if you have to be in the office from 6:00 a.m. to 8:00 p.m.

In relation to these cost of living, the salary for a beginner is NOT sufficient at around USD 60,000! After deducting taxes, health insurance, etc., there is not much left of the once nice amount.

Even as an associate, the lifestyle is nowhere near "rich & famous". With a salary of USD 120,000, we have arrived at a basic lifestyle, nothing more.

 

Conclusion:

I am aware that such statements are very subjective in nature. Ultimately, however, it must be clear to everyone that the beautiful job advertisements of the investment banks are due to the war of talents and that the salary alone does not make a statement about a possible upscale lifestyle.

On the subject of "bonuses" it should be noted that these have been reduced enormously compared to previous decades and furthermore are not paid out in full. Whether the bonus ever flows depends on other factors (company development, target achievement, affiliation).

The job of the investment banker should therefore be viewed critically by every young professional who wants to work as a trader. The activities as a trader are often limited to market making without being able to take on relevant responsibility.

Many also concentrate on applications to 10-15 employers without thinking outside the box.

We will venture this expanded view in the next article and examine the alternative “hedge funds”. Some interesting aspects are revealed and, of course, concrete figures again!

See you soon!

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