Fire the Senior, Keep the Junior: Hurt the Bottom Line

When it comes to many aspects in life, seniority rules, but in recent years, that hasn’t been the case for investment banks. Getting rid of the old guard and replacing them with the new made short-term, bottom line sense. Junior bankers were content to do the same job for much less than their more costly veteran counterparts.

What banks failed to consider was that senior bankers offered something unique in their experience, and it may now be affecting that same bottom line. A recent report on the fixed income market conducted by Greenwich Associates has shown that in the long term, this practice of replacing the old with the new is hurting banks. Clients are beginning to leave these banks filled by young bankers for banks that can offer higher quality services and bankers with decades of experience from which they can draw.

The report shows that clients were once able to “rely on the ideas and advice of veteran sales people who often had decades of experience. In the wake of dealer cost cuts and lower pay, headcount turnover has disrupted many of those relationships, and the replacement sales contracts are often young professionals not too far removed from university.”

New regulations and recent economic shifts have made this even more evident. Deutsche Bank, which holds 10 percent of the fixed income market, reported a €1.15 billion loss for the last quarter of 2013. Deutsche Bank leads the fixed income market, with Barclays, JPMorgan and Citi below it. As banks continue their experimentation with size, banker experience and other factors, the industry is beginning to reflect this flux. The major players in the international market are shrinking in their share of that market. The top three dealers held 28.4 percent in 2013, down from 29.3 percent in 2012, which has led to banks seeking to be less reliant upon fixed income revenues.

Still, as the big banks begin to relinquish their hold on the fixed income market, there will be greater opportunities for smaller banks to allow their presence in the market to grow, according to Frank Feenstra, Greenwich Associates consultant. What was called the “bulge bracket,” the wealthiest banks and their portion of the market, could continue to shrink in size and concentration in more than just the fixed income market.