Is it worth sacrificing extra comp in BB ER for LO AM?

I have to make a decision with respect to the offers I have at the moment. One is BB equity research (Citi, JPM, MS type), the other is a graduate programme at a large LO AM company, covering equities. Really fortunate to have made this leap.


Important to note that both offers are in London. This makes the compensation gap even more problematic given the tax rates. It's not that I'm expecting to live a life of luxury either, but the starting salary for AM is pretty low. I get that it's because I'm contributing almost nothing — in fact they're harnessing resources to train me.


To be fair though. The AM people were more respectful and willing to talk extensively. Numerous people have been promoted to analysts after exactly 2 years, and a considerable amount hit the PM milestone. The role is about fundamental analysis and aiding in the investment process.


Do you think the AM offer is worth sacrificing the extra increment in salary for now??


Bonus question. If yes, is there ever a way to live in London with ≤£40k a year?

 

Without details on your entire financial picture and how well your parents have done for themselves and your relationship with them, it’s really hard to tell you in a vacuum if you should eschew money.

Are you folks well off? Are you white or Asian? Typically Asian parents will help their kids forever. Do you have debt? Do you have to support anyone? What’s the pay delta?

If money was no object I would do the asset management because equity research is so rote and people so interchangeable. Also, based on your post it sounds like you really are more interested in the investing role.

 

Like previous said you'll start of low as on a Graduate Scheme you are very little value add, to the point you'll be a Drag on the performance but once you roll off the grad scheme and becoming an Analyst and are performing you'll be on 60k base minimum and bonus of whatever your PM decides which shouldn't be below 50%. At the end of the day do what you like but don't just assume you'll make it to LO AM from ER as it's incredibly competitive for such few seats.

 

Both of your options sound good, I had a similar choice with possibly a bigger pay disparity but opted for the higher pay, but since starting my job, I'm looking for options to get into the other field I was considering.

Not saying it's a great salary, but I'm pretty sure Big 4 and other new grads typically start at under 32k GBP and many a lot less. The decision is yours to make, but I would go for the best fit for your career unless you've got insane debt, or kids, or other immediate needs.

 

Everyone else has given you advice on which job to take and I agree: LO AM.

I'll add that living in London on <40k (even pre-tax) is easy. I lived in London on 21k and still saved money. You obviously need roommates and either your accomodation or your social expenses aren't going to be absolutely amazing, but it's perfectly liveable for a couple of years. After your deductions (including tax, NI, student loans, a 5% pension contribution, and the debt you said you had in another reply), it's 29k-ish a year to live on. Assuming living expenses are an extremely generous 20k a year (assuming you share: 1.2k rent, ~50 council tax, 100 bills, 250 food). You have 9k/year of play money to save or do misc activities with. So yeah, very doable. 

 

If the offer is not from TRP/Fido/Cap group I would encourage you to take the BB ER offer. Initially better comp, more optionality and prob better exits into L/S HF.   

 

He was talking about Equity houses, you got an offer in FI so what he said doesn’t really apply to you as the players in FI are different.

 

Yeah I know that smartass. Just curious to see his point 

 
Most Helpful

I'd suspect his point is that LO AM, especially on the equity side, is brutal right now and not nearly the slam dunk it may have been in the past. There are plenty of really good firms out there, but a year or two of bad performance and heavy outflows will kill you pretty quickly. That's before we start arguing about the persistence of outperformance among active managers, passive funds, etc. and the simple reality that a highly scalable, diversified business model is about the only protection for you at this point as a general matter. And that, without specific strategies tailored for your client base or consistent outperformance - may not even be enough. 

I'm in the fixed income world and even here you are seeing similar issues. Scalability is everything as non revenue generating costs continue to increase with no sign of abating. The nice part is you still have plenty of 'niche' areas (using that term loosely here) like distressed debt, high yield, etc. where there are more opportunities with the right team and strategy to outperform simply due to the structure of the markets. The players also have significantly different needs in many cases which makes a significant impact as your client base can drive you to strategies that are less interested in 'performance' as the differentiator. That said, not sure I'd want to be part of a middle of the pack core fixed income manager right now. 

The other irony as I think about this is as asset levels and values rise the owners of those assets have more ability to run their own money. Certainly many still hire outside managers but the trend towards larger allocations to passive, needing simply less seats or at least investment seats is palpable. And obvious as I'm certainly not breaking new ground with that thought. But to the point about LO AM being the gold standard - there's simply more options nowadays than 20 years ago. Especially at the institutional level. 

 

Work in LO AM. Majority of the people I know on the sell-side are pretty unhappy - coverage keeps increasing and staffing keeps declining so hours can be rough. LO AM has much better work-life balance in contrast. Just a thought.

 

I am not discrediting anything that was said above but I encourage you to look at both industries from a career perspective.

I personally would not consider comp as part of the equation. If you perform well in either role, you will be rewarded - both offer great pay at the senior levels. The real question is the degree of certainty that you will get there (if that is your goal between these two roles).

Looking at Long-Only AM, you could certainly argue that your day-to-day work may be slightly more intellectually stimulating than ER. You are the client and don't need to worry about communicating/writing as much. However, LO AM poses substantial career risks long-term relative to ER. There is no denying that mutual funds have been serving as an inferior choice compared with their passive ETF counterparts. We are seeing capital flow out rapidly from the active management space year after year, especially in the long-only sector where the value proposition is abysmal as 95% of fund managers underperform net of fees. That said, the deterioration of long-only active management certainly won't be an overnight thing (industry is very mature and has relationships with 401k plans and historically has been promoted by boomer wealth advisors). However, the ship will certainly sink as younger and more savvy advisors allocate capital from active to passive funds for their clients. Worst case scenario you lose your job likely in 15 years due to cuts. Best case scenario you stay on but experience great fee compression or a reduction in title/hurdle to advance to PM.

As with ER, the most important note going forward is that "It is far more profitable to give advice than to take it". In ER, you don't take the risks associated with capital withdrawals from long-only underperformance or changing retirement plans. Yes, you might have more routine/methodical tasks day-to-day but you are still coming up with investment theses. Don't forget that LO AM is very bureaucratic itself and experiences many obstacles from having true investing autonomy (e.g., asset elephantiasis, compliance, close-indexing). ER's biggest client has always been hedge funds anyways and the hedge fund industry clearly has better long-term prospects than LO AM. Thanks to the Yale Endowment Model / Swenson Approach, institutional investors seek hedge funds an alternative asset class/insurance policy against high volatility. You could argue that being a PM at a HF is risky but again you're selling advice to them in ER, not taking it. Also, the investment banking division heavily relies upon ER for client relationships and models to help with generating deal flow — providing both internal and external value.

Overall, I hope you find this post helpful, as I was in a similar situation. No question LO AM is substantially less of a value-add moving forward. If you decide you don't like being on the sell-side in ER, you always have the option to try a HF if you'd like to take on investing risk.

 

Not totally sure if I agree with everything, but I'll also add that if you're at a high-quality LO shop, the pay should reflect that. At a place like Fidelity or Wellington, you'll be making slightly less or the same as a first-year in ER while working less hours. If it's a LO shop that undervalues its juniors, that honestly doesn’t reflect well on them, particularly in an environment where junior talent has many other options. 

 

The value proposition for active mutual funds is nothing less than purely abysmal. Given that there have been decades of consistent evidence dating back to the 1960s, we have reached the point where it is undebatable that mutual funds, regardless of tier or the skilled manager behind them, will underperform their benchmark net of fees over long-term investment horizons (e.g. 10 years and up). Anyone who argues different is advocating for their own agenda/bias.

Nowadays, the only compelling reason that long-only active funds still boast ~$19 trillion of capital is due to investor inertia. The first mutual fund was invented back in 1928, whereas the first ETF was invented in 1993. Therefore, the mutual fund industry has had a 65-year advantage for marketing to investors and raising capital. Before the 90s, you're only way (as an average net worth individual) to get access to a diversified portfolio of equities/bonds was through a mutual fund. For this reason, mutual funds have historically been the bridge that have brought people to saving for retirement. They have been granted access to manage millions of people's 401k and savings accounts. The largest mutual funds employ thousands of salesman to promote their portfolios to the average Joe and local financial advisor. Again, this has all been happening long before passive indexing was created.

We currently sit in a world where a lot of the capital in mutual funds has been tied up. It becomes a tricky situation to renovate the 401k system and allow ETFs to overtake all responsibilities held by mutual funds. However, we have seen more wealth managers opt to put their clients' capital into passive indexes over active management -- hence, the recent capital inflows into ETS, away from mutual funds. The internet has also made information much more accessible to the average Joe so a few Google clicks can show regular individuals the advantages ETF investing has over mutual funds. The time it will take for mutual funds to lose most of their capital will take much longer expected due to the fact that they've been the historically preferred framework for mass-retirement savings. However, as the boomer financial advisors and money managers retire, the younger and more aware-with-the-times professionals will quickly reshape the way long-term investors deploy capital into the public markets.

All this to say, I almost personally wish mutual funds added more value than they actually do. The industry has been quite lucrative, especially for the better work-life balance than other finance fields like investment banking or alternative investments. Also, your literal job is to pick stocks which can be very rewarding and exciting in itself. However, it is clear the glory days of the industry are well behind us and all I can do now is look for a better opportunity in a different finance field.

Twisting your mind and smashing your dreams
 

Also should note, these elite LO AMs are evolving in the market. You only have to look at the movement into Private Assets to see that there will be significant change at these companies over the next few years. 

 

Yes, I am at a FI LO, the indices typically underperform most our funds or there flat out isn’t a passive tracker. I don’t even know how much less we earn compared to the Equity guys but you are either one or the other and likely not both.

 

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