1/11/17

Hey Guys,

Interesting post from WallStreetPlayboys here on the future of wall street. As many of you are going through junior year SA recruitment, I think we've come to realize that the "mood" has changed quite a bit.

The Future of Wall Street
For those that are in the "know" Wall Street is currently going through a major restructuring. The new issuance market (IPOs) has cooled off substantially when we compare 2016 to 2015 results and there is no reason to believe there will be a material snap back any time soon.

We'll outline our thoughts on how the industry will evolve.

Overview

Barbell of Banks: First, there will be a barbell approach to existing investment banks. This means that there will be two types of firms, first the type that provide primarily advisory services such as Moelis, Evercore, Qatalyst and Lazard and the second group that will have a mix of IPOs and advisory service. The catch? Everyone who is in the middle will be squeezed. Return on Equity metrics across the industry have declined materially and we have to look at how the banks will adjust to hit their return metrics. In an answer? Layoffs.

If we fast forward a decade or so we see two key changes. First the smaller banks will either die off or find some advisory niche. Second, the larger banks will down size to address core markets that have large revenue potential. With a cooling market, the clear answer is to cut the global equities business first.

Who Gets Cut: No one is immune to the cuts. However, the areas that will be hit the hardest include Research and Sales & Trading. As more clients move to electronic trading, the need for a human to match buyers and sellers becomes irrelevant. In addition, if the equity market is cooling off, there is no reason to have multiple senior analysts covering sectors with minimal investment banking potential. Finally, on the investment banking side, the clear loser in this case would be Equity Capital Markets. The silver lining here? Sectors with good banking potential or good growth potential in general likely won't be hurt much. The non-core sectors will be consolidated with more "multi-sector" analysts to keep costs down and maintain full coverage of US equities (Marketing for investment banks).

How Big Will the Cuts Be? Somewhere around 20% makes sense, perhaps up to 30-40% for some banks (think DB, Credit Suisse, Barclays) given the weaker environment and impacts of Brexit on European banks. We are still in the early innings of cuts, while some small reductions in force (RIFs) were made earlier in the year and over the last 2 months of this year... The Trend will continue. Anticipate seeing another set of cuts around the January time frame and don't be shocked when the hammer drops.

In addition to the cut in head count, expect bonuses to be down materially as well. We would wager another 15-20% decline in bonuses (we will announce the real numbers at the end of the year before normally available) but this rough math makes sense. If the cost structure is about 20% over staffed, you have to charge the restructuring costs of FY16 numbers so the layoffs don't really help the bonus pool at all.

The Safer Segments: The safest sector in our view is the advisory segment. If you're working for a top advisory firm and have buy-side relationships where you're "their banker", then you're in great shape. As long as you can offer good advice and help negotiate attractive deals, there is no reason for you to be displaced. Giving high quality advice is difficult work. This is a great dynamic for the industry as it is least prone to automation. Instead of simply reacting to rules like a trading algorithm, it is not easy to automate 1) multi-year relationships, 2) salesmanship and 3) a long track record of successful transactions.

Secondly, beyond the advisory piece we find that "hot" sectors will unlikely be touched. Expect a wider gap between the haves and have nots. This means sectors such as Internet (AirBNB IPO, Snapchat IPO, Uber IPO etc.), medical technology (including biotechnology) and energy for example. While we wont go through a list of each sub-segment, simple high level views should give a clear answer... Is there investment banking business to be done (new issuance and growth) or not? For fun we'll provide one example, which is banks themselves. If banks are cutting and downsizing along with overall secular declines, this is not a good sector to be tied to.

How about the buy-side? The segment is also in secular decline, ETFs, robo-advisory and significantly reduced management fees will be seen. While it will not occur abruptly, secular declines will be seen and the safest place to go is Private Equity or specific hedge funds.

- private equity will always be around. If/when interest rates start to hike... then it will become even tougher. That said, there will always be poorly run companies that need to be bought and fixed for a profit

- hedge funds, any fund pegged to beat or be in-line with the S&P (beta 1) will see secular declines. This is no different when compared to a long-only. The two pieces that will likely still be around are market neutral hedge funds and merger arbitration funds.

In short, avoid all investment vehicles pegged to the market. Go to PE or a market neutral/merger web hedge fund.

Automation: This will be the largest structural change we'll see over the next decade. Timing the exact year is not easy, however, any rule based position is going to be dismantled by automation. Cars will have self driving capabilities (somewhere around 2021 it seems) and the need for taxi drivers will decline as well. For Wall Street, this is the trading segment. Matching buyers and sellers for a few pennies per share, will decline materially. An automatic, electronic trading mechanism will decrease total revenue associated with these transactions and this will cost fractions of pennies per share. The need for human involvement declines for most day to day activities.

Automation will not impact relationships on a massive scale given that trust is a difficult quality to build over a multi-year time frame (let alone automatically).

Is Wall Street Still a Good Career: We will now answer this with "it depends'. If you're going to end up at a major bank post the downsizing (you're likely ok) and if you end up at a top tier advisory firm, you should be thrilled with the opportunity. The upside to attaching yourself to a growing sector or a major advisory firm will remain unchanged. When you make a percent off a billion dollar transaction, there is enough money to be dolled out to everyone. The only problem is each individual should choose carefully. If the sector goes into secular decline, either you will be fired or you will get lucky and be a multi-industry expert as spaces consolidate.

Long-story short, there are really only two paths that make sense. A major bank within a good sector (either the bank is good at getting on deals or they are expanding) and secondly within advisory.

Now what? The silver lining here is that many sectors will need more bodies. Technology will not slow down any time soon and this means being an engineer is also a good career. You're still going to go into: Sales, Silicon Valley or Wall Street. This advice hasn't changed, the only difference is that you have to be even more careful when choosing your niche. There will be an immense amount of growth in technology and overall innovation and the opportunities will be endless (for a select group of smart people)

Best Ways to Make Money

Sales: The common theme here is that everything is still sales. If you can build up your ability to sell and build trust at the same time, you're going to be fine. This does not require fancy degrees or thousands of dollars of college debt. This only requires hard work, persistence and an obsession to become successful. The days of being paid without eating what you kill are dying slowly but surely. The producers will continue to make grips of money and support roles that do not require sales (clerical work) will be eliminated.

Technology: If you have the skills, going into technology is still a great sector. Facebook, Google and IBM will still be around in a decade and having a set of skills that are difficult to learn will help you land positions at major technology companies. Negatively, this segment will also be cut between the haves and have nots. Hardware engineering for example is simply not as useful as software engineering. So. Choose the sector carefully, got to a top school and find a way to avoid debt. This will give you a clear path to riches.

Wall Street: As mentioned above we think advisory and "hot" sectors are best. That said? Go to a big league advisory firm if given the chance. If you're working for Frank Quattrone and are involved in many major transactions, your resume will stomp out all of the competition over night.

Starting Your Own Company: This is the second leg of the puzzle. If you can land a solid career, within a short couple of years you'll have enough to begin your own venture. Once you do, the sky is the limit. It is very difficult to get rich working for someone else, they are never going to pay you what you are worth otherwise they would lose money! As always refer to our post on a clear path to a million dollars.

Ramifications of Wall Street Adjustments

- The ability to obtain a position on the Street will decline. The competition will continue to be fierce and the number of slots will decline (structurally)

- The number of positions in Global Equities will decline materially. This will lead to a swath of people fighting for corporate finance roles within specific companies

- Crowd funding will prevent smaller scale IPOs. With ways to raise funds outside of debt offerings (mezzanine, bridge loans, etc.) before going public, the time frame will become elongated. In short, there will be longer sales cycles unless the economy is rocking and rolling

- Generating revenue will be tied to performance based bonuses. While there is always some wiggle room for the sales cycles, if the sector/group is not producing the bonus differential will magnify. Don't expect to get paid simply because you did all the right things (followed the rules). You have to generate revenue.

- Top tier students will likely flood technology. With financial packages that are more attractive when compared to investment banking the cream of the crop will turn to positions at Google, Facebook and other large and growing technology companies. The remaining that attempt to go into Wall Street will be difficult to compete with, however, they will no longer be the top of the top.

Conclusion

Wall Street will go through material changes over the next several quarters, however, there are still slots that will offer large compensation packages and upside over the next several years. The performance based structure of the industry will move to "eat what you kill" and it would be wise to choose a segment or sector that will be growing and not consolidating.

--

Side note on politics. Yes Donald Trump will win the presidency on November 8. We placed a financial wager on Mr. Trump last year and it will pay off. Despite many concerns about his potential downfall we know with certainty the polls are skewed and yet he's still within spitting distance. As more negative news surrounding Clinton surface, the inevitable outcome will be seen. Brexit 2.0.
http://wallstreetplayboys.com/the-future-of-wall-s...

Discuss

Comments (30)

Best Response
11/3/16

"The safest sector in our view is the advisory segment".

The above sentence is the most important sentence in the entire article and really the only one you need to read. The bonuses are never going back to pre-2008 levels, but the skills learned in IB will always remain unmatched, while the services of the IB industry itself will always be needed by companies.

I would not spend a great deal amount of time worrying about trying to time the career market. At the end of the day, smart and able individuals will enjoy relatively great mobility between career paths. Take a look at some of the most successful people in any industry- many of them did not start their careers in that industry.

On a side note, I also really hate how everything from trading to private equity to investment banking is lumped into "Wall Street". Some of these industries could not be more different from each other.

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11/3/16

Yeah I got the same thing from the article. It seems like everyone already knew this considering IB/PE are the more sought after careers. Old news.

11/6/16
Sil:

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p> At the end of the day, smart and able individuals will enjoy relatively great mobility between career paths.

WSO's COO (Chief Operating Orangutan) | My story | My Linkedin

11/9/16
Sil:

"The safest sector in our view is the advisory segment".

The above sentence is the most important sentence in the entire article and really the only one you need to read. The bonuses are never going back to pre-2008 levels, but the skills learned in IB will always remain unmatched, while the services of the IB industry itself will always be needed by companies.

I would not spend a great deal amount of time worrying about trying to time the career market. At the end of the day, smart and able individuals will enjoy relatively great mobility between career paths. Take a look at some of the most successful people in any industry- many of them did not start their careers in that industry.

On a side note, I also really hate how everything from trading to private equity to investment banking is lumped into "Wall Street". Some of these industries could not be more different from each other.

there's still a major issue with this post. all trading isn't created equally. he only speaks about equities. FI is a very diverse business. you can't just group "trading" all together. If anyone has some actual insight about the future of trading, especially after this election I'd like to hear it //www.wallstreetoasis.com/forums/republican-landslid...

1/10/17
Sil:

On a side note, I also really hate how everything from trading to private equity to investment banking is lumped into "Wall Street". Some of these industries could not be more different from each other.

They are all vastly different. But we all know why this is done. Traditionally, Wall Street is the place to buy and sell securities, which is mainly what investment banking is.

1/11/17

A counterpoint, if I may. Every article like this talks about advisory as if it were synonymous with sell-side M&A, and they all miss the point. Virtually all aspects of investment banking involve a level of "advisory" or in other words, some combination of personal networks, product expertise and company/industry domain knowledge. Whether you are on a trading desk or capital markets team, an industry coverage or leveraged finance team, you will develop valuable advisory skills. Having a balance sheet is not antithetical to providing sound advice, no matter what Ken Moelis says to the press.

11/3/16

I'm probably one of the most fearful of the long-term prospects in finance out of many of my peers. I want to get into electronic trading since that's probably the one area that I'm confident will be growing (its very limited to just a few asset classes and products at this point in time) for at least the next decade or two.

I think the lines between what consultants and bankers do are becoming increasingly blurred. Big 4 Transaction Advisory teams may step up and start competing for some smaller deals (which will largely impact boutiques and MM shops) and with AI coming, we can get to the point where firms like Deutsche go from 100k employees to 70k. I think retail banking will be the hardest hit. We may start seeing entire locations that are 100% automated.

Realistically though, you can't predict the future. If you want to ensure you have a career in finance for the long-term, I don't care if you're in banking, research, PE, VC, whatever, get your CFA, because if in 10 years from now we're seeing massive cutbacks in headcount, the guys that will survive are the ones that are already senior and high up the ladder (thereby pulling in business), and on the lower end of the food-chain it'll be those with really strong networks (and therefore senior guys pulling for them) and those that have credentials to back them up.

My personal opinion is in 20 years finance will look like accounting today. There will be jobs, but an accountant without a CPA (with the exception of government employees) will in 9.5/10 cases never pass $90k a year.

Essentially if you know how to code and you have your CFA, you become a talent regardless of how the market evolves and there will always be a spot for you. If you can't code and don't have any strong credentials, you'll need an uber strong network or you'll likely become expendable at some point.

Finance is an interesting industry in that it is both way ahead of the times and way behind depending on how you look at it. Firms are utilizing cutting edge tech in some areas, and in other areas they're paying kids $105k who are basically transferring phone calls, learning from their superiority, making PowerPoints look aesthetically pleasing, or in other words, they're apprentices.

11/3/16

"Firms are utilizing cutting edge tech in some areas, and in other areas they're paying kids $105k who are basically transferring phone calls, learning from their superiority, making PowerPoints look aesthetically pleasing, or in other words, they're apprentices."

If these "apprenticeships" did not exist, who would lead/land deals in 10-20 years? I see it as a type of succession planning

11/3/16
Brosef Stalin17:

"Firms are utilizing cutting edge tech in some areas, and in other areas they're paying kids $105k who are basically transferring phone calls, learning from their superiority, making PowerPoints look aesthetically pleasing, or in other words, they're apprentices."

If these "apprenticeships" did not exist, who would lead/land deals in 10-20 years? I see it as a type of succession planning

Personal opinion is that the industry will evolve to a point in which perhaps college isn't truly necessary. As it is you learn 90% of what you need on the job. I'll probably get a ton of MS thrown my way for this comparison but it is similar to being a carpenter or electrician, they have apprenticeships and learn on the job. Some go to trade schools and they start at a higher pay grade, but regardless they come in as apprentices.

It is succession planning, but the way it is done can be changed dramatically. Germany has a lot of programs that don't require post-secondary education, you choose a profession and get trained for the career you want. This isn't something the financial services industry will be doing any time soon, I doubt we will be seeing 17 year old high school grads hitting the trading floor any time soon, but I do think there will be substantial change in the way talent is trained.

However at this point even with $3-4m training budgets for each analyst class, its a blip on the radar for the major firms, so it isn't in the crosshairs as of yet, but that can change.

Truthfully I see no reason why 12 week bootcamps couldn't lead to internships in financial services, similar to how it works for software engineering at this point in time. You have kids signing up for programs, learning to code in 12 weeks with a 100% job placement guarantee or they receive their tuition back. Maybe that is the direction the industry heads. I think what Point72 is doing is way ahead of the times with their Point72 academy. Perhaps PE firms will design academies to train young talent and those programs will place people with funds similar to how the medical industry functions. That would cut out the need for poaching sell-side talent and headhunter fees and would allow them to train individuals precisely how they want them trained.

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11/3/16

Prognostication is a fool's errand

11/3/16
iggs99988:

Prognostication is a fool's errand

100% true.

That's why for those that do have a fear of the future, you should just play the good old cover your ass game and learn coding and/or get your CFA. If you do both you'll be fine.

11/4/16

Idk about the true importance of the CPA

11/4/16
Cosimo de' Medici:

Idk about the true importance of the CPA

I am not saying it is the end all be all but all else equal a candidate with a CFA > candidate without a CFA.

I also have a feeling that the designation will be given some official authority over time, similar to the CPA. If I'm not mistaken when it originally came out in the late 19th century it didn't hold any official authority, but gained it over time.

1/10/17

I'll give them credit for calling Trump. But, they're wrong about advisory. The regulatory and interest rate environment has become a lot less attractive for M&A over the last year. Even Trump getting elected doesn't seem likely to change that. There just aren't that many obvious targets left. We've probably hit peak advisory.

12/28/16

Agreed, especially in regards to the healthcare / biotech industry

1/11/17

The article makes complete sense. I've read the same said by multiple people now across multiple industries--relationship-based jobs (in this case VC, PE, FA and M&A) are the ones that are going to thrive when everything else gets automated. I do agree though that having your CFA is going to be more of a distinguishing feature soon. Also, I can see the bootcamp style thing happening, specially now that companies like Wallstreet Oasis, Wallstreet prep, and Breaking Into Wallstreet exist.
Only thing I'd add is, I don't think Prop trading at the smaller firms is going to die out any time soon. In the bigger/multi-field firm? Sure. But you have this whole lot of small prop-trading firms like 3T Trading Group Inc., Real Life Trading inc., who are offering to hire you as a prop trader and train you to work on their hedgefunds/prop trading accounts for a split in commission--no college necessary. I can see this type of trading growing pretty big while the other more established prop trading at the major dies out or grows significantly smaller.

1/11/17

If all the jobs are going to tech should I switch my major to computer science? What does the pay look like for straight-out-of-undergrads working at hot tech companies (FB/Google)? I am just curious to see how this compares with IB.

I am a freshman in college at the moment.

1/11/17

Absolutely not. Tech starts at around $100000/year, but you have to have at least a Masters--sincemost of the key jobs are now in Artificial Intelligence and that kind of thing college wise. My advice is get your B.B.A (Bachelors in Business Admin), and once you finish that, if you're really interested in tech go to a bootcamp. If not, you can always use your BBA to go in on the financial side of tech companies, or use it to go into VC/PE, where you can easily jump over to tech--specially if you choose to focus on Telecom/Tech PE or VC--any VC. Don't go for SC or CE or CEE (Computer/Electrical) unless you know you want to do that for the rest of your life and have no interest in Finance.

1/11/17

The big tech companies pay $110k base and $100k~ bonuses year 1. And SOs that vest over 3 yrs. all that those out of undergrad. But put that in SF where col is outrageous and it nets out similar to NYC and first year Analyst

1/11/17
TippyTop11:

The big tech companies pay $110k base and $100k~ bonuses year 1. And SOs that vest over 3 yrs. all that those out of undergrad. But put that in SF where col is outrageous and it nets out similar to NYC and first year Analyst

Are you suggesting tech companies pay bonuses?
That's news since when?

1/11/17
jorgeapaez:

That's news since when?

Since forever?

Standard software engineering entry-level comp at Google is like this:
$110k base
15% minimum bonus (with a 1-2x multiplier based on company and individual performance)
135 GSUs (a.k.a ~$108k stock over 4 years, which translates to ~$27k a year)
$25-30k signing bonus

People then do hot potato to negotiate higher stock/signing if they have comparable (or higher) offers at other well paying tech companies.

1/11/17

A couple of my friends going to Google FT as a SWE got around 108k and then about a 12k singing bonus I believe. My friend going to Facebook is getting a little more and a friend going as a developer at a top HF (I believe because she knew jackshit about HF and the prestige of that place to get an algo job) is getting around 180k all in first year.

These are real starting salaries and yes the starting salaries in tech have gone up a lot in the last decade. I know a lot of the older tech companies are also raising their out of undergrad salaries to attract young people and have heard from many people there that it is hard to compete for good SWEs.

If anyone wants to talk tech salaries/prestige/whatever, I know much more about that than finance as that's what everyone in my personal life does.

1/11/17

Oh, and I forgot to add, if you really, really like Physics, I mean enough that it can be your major, you could easily get a B.S. or a B.A. in Physics--that would give you enough math to make you a good analyst and enough science to get you into a pretty good job on the tech side too.

1/11/17

It would also make you less competitive with your lower GPA compared to the English majors who barely went to class and got 4.0s.

1/11/17
differentialequations12:

It would also make you less competitive with your lower GPA compared to the English majors who barely went to class and got 4.0s.

Seriously?
I mean sure Physics wouldn't be my thing but there's no reason why you can't get a 3.5 in it if you're into it and its something you really want to do.

1/11/17

Have you taken STEM classes at a hard school? They don't play nice.

Sure you could get a 3.5, but it would be much harder and be more of a burden than fun unless you were really good at math and LOVED physics.

However if you want to go for algorithmic trading or something that is a different story.

1/11/17

As someone about to enter college with no desire to learn coding, this is pretty scary.

"Truth is like poetry. And most people fucking hate poetry."

1/11/17

I recommend this to anyone going into anything. Take at least one intro to CS course. It may be hard depending on your school, but it'll let you think about if it's for you and give you a little perspective on where the world could be heading.

1/11/17
1/13/17
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