Finance is the engine of our economic growth and the core of our capitalist system. Many areas of finance are exciting and lucrative while others are underwhelming. We offer insight into some different areas of finance and discuss which have the highest and lowest compensation, the best and worst hours, the best and worst upward mobility and which areas are expected to see the highest and lowest employment growth over the next decade. Here’s a few of the areas of note for aspiring financial professionals:
Few areas of finance are as lucrative as the hedge fund industry. Landing a job at a hedge fund isn’t easy, nor is the work while you’re there, but the pay-off can be huge due to their unique fee structure. These funds charge an annual management fee, typically 1-2%, plus a performance bonus of typically 20% of total profits or profits above a risk-free benchmark such as U.S. Treasury Bonds. If the fund has a big year, bonuses are quite generous for many employees, especially for fund managers, prescient analysts and profitable traders. If the fund has a down year, bonuses are low as is job security. Such is the high-risk, high-reward nature of many hedge funds.
Hedge funds are large funds of private capital with little oversight or constraints. Basically, these are funds for institutions (pension funds, endowments, etc) or accredited (very high-net worth) individual investors. The funds can be invested in several different, non-correlated strategies and thus are considered an alternative asset class. Alternative means something different from traditional mutual funds ‘long-only’ style of buying and holding stocks. Examples include risk-parity, long/short, convertible arbitrage and distressed debt. Sometimes hedge funds take stakes in publicly traded companies and take an activist role. Activists can push proxy battles to oust CEOs or members of publicly traded companies Board of Directors. While the traditional strategy of hedge funds is to reduce risk in a portfolio by focusing on absolute returns, the reality is many hedge funds use heavy amounts of leverage, sometimes as high as 30:1.
Private equity is another alternative asset class that has gained increasing popularity in recent years and now boasts almost $4 trillion in total assets under management.1 As the name implies, private equity provides capital for private companies, often distressed, businesses. Through their advisory services, contacts and capital, private equity funds often attempt to turnaround struggling companies by helping them get access to working capital or restructure their debt. Private equity firms make not only loans but also equity investments in these companies, typically by buying existing distresses debt. Sometimes the investment comes in the form of different classes of stock or convertible securities (such as warrants or convertible preferred stock) into equity if the company is successful.
Private equity firms have an exit strategy for their holdings, or portfolio of companies, so that the funds partners and investors can get their money out and move onto the next deal. The majority of private equity firm’s deals are buyouts and real estate. Private equity funds have a similar fee structure to hedge funds but one of the main differences is the illiquid nature of the fund’s holdings. As such, many investors agree to long lock-up periods where they cannot access their capital. This may be as long as 3-5 years.
Commercial banking provides services to individuals and small businesses. For individuals, commercial banks provide a variety of services including basic banking services such as checking and savings accounts, certificates of deposit, CDs, safe deposit boxes, funds transfer, currency exchange, mortgage loans, retirement and estate planning. For businesses, commercial banks make and service loans, provide factoring services for accounts receivable, payment processing, merchant services accounts and cash and Treasury management solutions. These institutions employ bankers sometimes called relationship managers, personal bankers or community bankers.
Commercial banks typically have strong ties to their clients and the community they serve. But they also are very important to the financial health of our economy. With tighter regulations stemming from the financial crisis, there is more emphasis on the more traditional aspects of banking, making the difference between what banks pay depositors and what they lend out in longer-term mortgage loans. And of course, charging fees.
Investment Banking raises money and provides expert advice on transactions for public and private companies. A firm’s Investment Banking Division typically has three main divisions, Sales and Trading, Underwriting and Mergers & Acquisitions. These banks raise capital for clients primarily by underwriting debt and equity offerings.
For initial public offerings, IPOs, investment bankers handle the filings, roadshow presentations and are responsible for making sure all the offered securities are “placed” (sold) with their clients. The sales and trading team coordinates the placement of stock and the firm’s specialist or market maker facilitates much of the trading. If the investment bank can’t handle an entire deal with its own resources, it will use the services of additional partner banks, called the syndicate. Investment banks were clamoring over the chance to underwrite the largest IPO ever, Alibaba, in 2014 with Barclays winning out for the top spot.3
The line can get a little blurred between the investment bank (acting as agent) and the firm’s proprietary operations (as principal). For example, the firm may use its own capital or investors to be early investors in the company, while it’s still private. Then, when it’s time for the company to go public through an IPO, the firm’s investment banking arm will handle that transaction separately. So they have an actual equity stake in the company but also get the capital raising fees associated with the IPO (traditionally 7% of capital raised but that’s come down and now is in the lower-to-mid single digits).
Investment bankers have very high pay, but their employment is cyclical and lower-level analysts often endure brutally long work weeks working on spreadsheets.
Mergers & Acquisitions
The Mergers and Acquisitions, M&A, department is another unit of an investment bank which handles a variety of transactions for corporate clients. As the name implies, the main types of transactions are 1) mergers and 2) acquisitions. A merger occurs when two companies join together and form one, brand new company. In an acquisition, one company decides to buy out another company which simply gets integrated into the acquirer. The acquired company no longer exists.
Sometimes, companies will do the opposite and divest or shed a unit through either a sale or an IPO. General Electric is an example of a company that frequently is involved in M&A transactions, selling off lower-margin businesses including GE appliances and NBC Universal. In 2015, they spun-off their finance arm, Synchrony Financial.4 Weil, Gotshal & Manges, LLP advised GE, their long-time client, on this transaction. Weil’s Capital Markets utilized their tax, legal, real estate, compliance and structured finance professionals resources, among others, to help facilitate this almost $6.6 billion debt and equity transaction.5
Generally, the better the economy is, the more credit is available and the more companies are willing to pursue M&A transactions. Through November of 2015, the value of global M&A transactions is $4.57 trillion which is on pace to top 2007’s reported total of $4.61 trillion.6 That translates into more pay for M&A professionals. Payment for the investment bank sometimes comes as a percentage of capital raised so it’s no surprise pay for M&A bankers can be quite large.
With the plethora of rules and regulations placed on publicly traded companies, not to mention a very complex tax code, accountants are in high demand. It’s no surprise that the unemployment rate in accounting is well-below the national average at just 3.6%.7
In the private sector, accountants, auditors, clerks and other associates prepare, examine and file financial documents and tax returns for clients. The clients range from individuals to publicly traded Fortune 500 companies. Many wealthier individuals use public accountants for more complex tax needs. Publicly traded companies must have audited financial statements so they contract lots of business to the Big 4 accounting and auditing firms among many others. Additionally, documents filed with the Securities and Exchange Commission, SEC, must be signed by a Certified Public Accountant, CPA. Some schools help students prepare for the CPA exam as part of a Masters in Accountancy program.
Other jobs in accounting are in the public sector including government agencies. Tax examiners and revenue agents work at the Internal Revenue Service, IRS, making sure taxpayers are meeting their tax obligations. Government agencies and law enforcement are also employers of forensic accountants, a fast-growing specialization which helps detect and combat fraud and different economic crimes. Sometimes government accountants audit other areas of government to ensure taxpayer money is used appropriately, as done by the General accounting Office, GAO.