Wall Street Comp Structure - Banker vs Broker
http://blogs.wsj.com/deals/2009/02/04/wall-street-...
Interesting article how brokers/traders are paid FAAAR better than bankers when you compare how much money they make for the firm. They mentioned that in an acquisition a 100% retention bonus is industry standard. So you made $1 million for the bank, you get a $1 million retention bonus. They also noted that UBS paid as much as 260% of revenue production. Then compare an M&A banker that brings in $75 million for their bank and they get a $5-10 million comp.
I have a few theories...
#1- its far easier to be an all-star trader (logistically, not easier as in requires less talent). When you come in on the ground level, there is opportunity for a trader to quickly start making enormous money for the firm. Whereas a banker, will most likely not have any capability of sourcing business and generating revenue (fees) until he's close to the MD level. This has facilitated traders rising through the ranks extremely quickly by making enormous profits, inherently front-loading the firm's management with traders/ex-traders.
#2- the logistics of trading is such that (and correct me if I'm wrong) a trader can generate profits with little supporting staff (relative to IBD). While an MD banker needs an army of analysts, associates, and VPs to support his deals and see them through to fruition. This basic difference in the structure of these 2 divisions allows S&T profits to be attributed mainly to the traders generating the profits, while IBD has significantly more overhead.
#3- traders generate revenues basically through their own competence, and while IBD bankers may do the same, there is a significant weight associated to the brand/goodwill of their bank. While a banker at Goldman Sachs TMT have his own relationships, there is no doubt the Goldman name helps snag some of those whale clients. Traders however are generating profits which are for the most part in no way using the banks name as a catalyst (outside of leverage they wouldnt otherwise be able to get and a bankroll they obviously can't sustain themselves). This is demonstrated (IMO) by the large proportion of all-star traders who end up starting up a HF or defecting to go to work for a HF. Compare that to the relatively small proportion of all-star bankers who end up opening up their own shop.
Anyone care to weigh in?
You're on to something
but you might be overstating your case with #3.
Many traders (it depends) are trading flow, or benefitting from their firm's flow through better information. They also use analysts (though fewer than IB, I suppose).
Then, of course, there's luck. Any honest discussion of trading profits has to include a discussion of luck. In particular, given the compensation structure of traders, it makes a lot of sense to take big risks and to sell lottery tickets, meanwhile providing a great story about why lightning won't/can't strike your trade. It works until it doesn't, and in the meantime everyone thinks you're boy wonder, and you get paid like it. Even without this (conscious or unconscious) gaming of trader compensation, luck inheres in all directional trading or "arbitrage". It makes the difference between (smart and doing fine) and (smart and killing it).
I'm pretty sure you misread
I'm pretty sure you misread the article. Brokers get 100%+ retention bonuses when they get acquired by another firm, similar to a sign-on bonus.
To your larger point on traders vs. bankers - you're wrong on #2. If you read the history of Wall Street, M&A really took off in the 70s as a product service. Before that, M&A advice was largely provided gratis as part of the debt/equity raisings that were seen as the bigger money makers. M&A became attractive once firms realized they could charge for a service that requires extremely low working capital.
Traders need lots of computers (hardware/software/support/cooling), expensive information services, extensive back office support and huge, huge amounts of working capital.
On point #3, I think the proportion of revenue generated to compensation is actually roughly equal (or at least in the same ballpark). Though bankers use the firm's brand, traders use the firm's capital and systems. I don't know if it nets out roughly equal because of that or because upper management wants to minimize discord between the two groups.
Financial Modeling Training
Guide to Finance Interviews
Banking Resume
I gotta run so I really
I gotta run so I really didn't read most of it,
but I quickly wanted to say that the main difference is that brokers work with THEIR clients (not the firm's), whereas bankers simply work with the firm's clients (institutions). That's the difference. If a Goldman MD jumps ship to MS, the odds are that his client will stay with Goldman (unless he happens to be an uber-high profile MD). If a broker switches firms, he brings his clients with him-- hence the need to give them these bonuses (to keep their clients with the firm)
I think you're all
I think you're all completely off base here. They are comparing the nature of the banker and the trader to the Wealth Management RM.
While it make seem like a banker/trader gets paid more (guys with 10MM salaries, high bonus potential, etc.), the article points out the pay structure is different. Bankers and traders are only paid a small portion of their salary based around how much they bring in. Brokers get paid a larger portion.
Here's how an RM's salary works. They accrue AUM by whatever means there are (trading for hedge funds/institutions, managing funds for UHNW/Family office entities, discretionary and fee asset management, 3rd party asset management through a managed accounts platform) and are paid fees on it, depending on the structure. For the most part, any type of trading (FI/Eq and all stops in between) are on a commission basis, while any sorts of AM product is done on a fee structure around the AUM in the account. Additionally, any placement into Hedge Funds, PE Funds, VC Funds or other investment entities and the sale of insurance and other products will provide the RM a trailer that has a residual payout. Some products are a 1 time deal, while others have a longer payout over time. As such, that's how the RM's book of business grows.
What happens next is where it gets a bit confusing. Compensation is as follows: Any fees and commissions you bring in are added up to get your Gross Production. This is the total amount you have brought into the firm in a given year. Every product has a different type of payout, depending on the investor and what's being done. So an individual doing an equity trade may have a payout of 80%, while an institutional investor may have a payout of 45%. The net production is how much an RM makes a year once you factor in the different payouts.
To put some figures to this, if an RM does 1MM in gross production, all said an done will take home 500K as a net figure. All this talk of retention bonuses and the like is a misnomer. When an RM jumps to another firm, he gets an upfront cash payment of at least his previous year's gross production. If it's a much more high profile name or he is a major player, they may offer a larger percentage to get him to jump. UBS used to offer 260% of Gross Production in order get brokers to jump to UBS. The biggest value is the cash portion, which is what most brokers look at. The equity portion is kinda useless. When the RM jumps to another firm, it is expected he will take his book of business with him. 95% of the time, clients move with the RM unless they have investments, such as PE funds, that cannot be moved due to being proprietary. Depending on the structure of the deal, there may be clawbacks if an RM can't bring over his full production after x number of years. RMs also sign themselves over to a multi-year contract when they move shops. There is no reason a place like MS would pay 160% of Gross Production for a broker if they were not held to a 4-6 year contract because brokers would jump shop every 2-3 years if they could.
I know it's alot to digest, but let me know what you think.
Interesting article. It
Interesting article. It seems like their is a dilutive factor as the size of clients gets larger generally speaking. IBD take away the smallest percentages of deal, followed by sales and finally pwm brokers. This probably has to do with how central that particular person is to revenue. In PWM, unless you have a specific broker, you won't get that client's money. Sales guy's rolodexes are important but they get passed more frequently and the clients are sophisticated enough to rely on multiple banks. Finally, M&A deals and ECM-DCM transactions are first and foremost a product of what IBD clients do; the bank performs the work but if not for the companies involved, there would be no deal.
Trading on the other hand, is probably much more influenced by the buy-side. The sell-side tries to give a decent fraction of what would be attainable elsewhere (if you're trading prop), but discounted for the fact that you are supported by a huge institution.
Financial Modeling Training
Guide to Finance Interviews
Dont know if some has
Dont know if some has already mentioned the following:
Bankers have a better risk-adjusted comp structure, period: brokers' bullshit can only go so far in a down-market (say goodbye to commissions); traders need lots of capital to make lots of money (to the uninitiated capital allocations depend on market conditions, which suck). There are deals to be done no matter what the economy is doing. Bankers (particularly M&A advisors) can capitalize on opportunities at any point in the cycle, whereas traders depend on capital and brokers depend on investor morale (all of which are cyclical).
By the way, Marcus. Love
By the way, Marcus. Love your American Psycho reference.