I’m sure you’ve heard all about investment bankers. You may have heard about “Masters of the Universe” that make deals happen at a whim and who drive Ferraris and live in mansions. Or perhaps you have heard of investment bankers who are nothing more than slaves typing away at keyboards constantly with no lives outside of their jobs, chained by golden handcuffs that are never removed.
But which one are they? Or are they both? I’m going to be doing a short series on The Investment Banking Hierarchy from the lowly Analysts to the Managing Directors that sit atop the food chain. Obviously I will be making generalisations but hopefully this series will give you a better idea of what the food chain looks like and who sits at each point on it.
For a humorous look at this same hierarchy have a read of Money Business – it is one of the funniest (and most unfortunately accurate) views on the life on an Investment Banker. You can also read my review of the book here.
Who are The Analysts?
The analysts are the lowest rank on the Investment Banking ladder. However far from being unimportant, the analysts are the powerhouse of the Investment Bank…nothing can be done without them.
The analysts do all the grunt work including pulling together the financial models and presentations and making all the relevant (and pointless) mark ups to the various pitches and presentations. They work the longest hours and have the lowest pay of anyone in investment banking (which is still pretty high).
The pay-off for them is the opportunity to go to the promised land of private equity / hedge funds or senior investment banking positions. More senior bankers (especially the associates) could do the analysts job but that’s what delegation is for (and associates are so busy they would probably explode if they did any more)
Where do they come from?
Analysts are hired in one of three ways
- They are offered a graduate role after doing an internship
- They are offered a graduate role through a direct interview process
- They lateral in from another industry or another investment bank
Analyst positions are the most hotly contested positions and because of the demand for them, investment banks tend to be very choosy when it comes to analyst hiring. If you are looking to become an Investment Banking Analyst head over to my section on ‘Getting into Banking’ for some tips on how to get in.
The analyst hierarchy
Within the analyst pool there is also a hierarchy which is based on experience and number of years worked. Here is a summary of the different analyst years and the typical evolution that an analyst will normally go through
The First Years
These analysts are the ‘fresh meat’. They are the most keen and willing to do work and they also have the most energy (and are generally the friendliest too). They are untested and untrained and they are trying to earn the trust of the more experienced bankers…because they invariably make mistakes.
The best part of the first year for analysts is the training they get. Most bulge bracket firms will fly their analysts to either New York or London for a month’s training program. The work is not overly difficult and almost all expenses are covered by the bank. Once training is over however the real work begins.
The first years start by doing really basic tasks such as downloading and printing relevant documents, making industry profiles and being the research work horses for everyone else (especially the directors). During this time they also become kings and queens of formatting – able to spot a double space at 100 paces.
As they start to prove themselves they will gradually be allowed to touch the financials. No LBO’s or massive merger models just yet (contrary to what most grads seem to think they will be working on). They will first be allowed to comparable companies trading sheets and industry comparable acquisitions files (mind bogglingly boring files that actually require a fair amount of attention to detail and effort to keep properly up to date). All their work will be double checked by a senior analyst.
First years typically work the longest hours. Not because they get more work but rather because it takes them 3 times as long to do anything as everyone else. The work they tend to be given is also less predictable which doesn’t make for a very fun year.
The Second Years
The second years are not quite as keen as the first years. They are a little bit jaded and they are starting to look distinctly pale and drawn. However in banking terms they are starting to come into their own. They are now masters of Power Point, have nailed the basic excel models and the associates no longer hawkishly check everything they do.
However as they become more trusted, rather than being able to settle into their routine they are now exposed and responsible for more complex financial modelling for deals and pitches including DCFs, merger modelling, LBOs and whatever else the deal requires. These models are checked pretty carefully by the associates but not like they were in first year.
I’d argue that the second year is the hardest year for analysts. They are finally trusted to do everything there is to do on a pitch or deal but they are not yet senior enough to delegate to the first year analysts. It is also the year that most people get their first real deal under their belt. Deals done in first year don’t count…you may have formatted the document but this isn’t really doing a deal. You also get far more client interaction especially on process driven aspects of deals such as running data rooms and sending small pieces of analysis to a client.
The hours are much better than in first year but the stress is also higher as there are a lot of expectations without much support. The pay is also much better in this year but a lot of people (who haven’t paced themselves properly) also burn out and seek greener pastures.
The Third Years
Third years are the efficiency machines at the banks – they are completely trusted when it comes to modelling and presentations and are very fast. However they are also the most bitter and tired. They have seen their friends and comrades leave for bigger and better things and most are thinking about their exit options versus drudging along in the same life for years to come.
There is a lot less stress in third year because they can typically hand over much of their menial work to first years coming in and can therefore concentrate on the ‘higher level’ stuff. The interactions with clients are also more involved. As the third year is normally the one who has the best understanding of the models they are often the ones explaining to the clients how they work and what assumptions have been made.
Most people start to job hunt in third year (only after the bonus has actually hit the account) because you are in more demand than you will ever be in your life. You have 3 years of banking training and EVERYONE knows it. You also don’t need to take as big a pay cut to move (which can be a huge mental barrier for some people) and you are young enough to retrain into other areas. With all this demand external to the investment bank motivation for the third year is often the biggest issue and most people end up leaving in this year.
Whilst still not normal the hours in third year are the best of the analyst years. A lot of the grunt work can go to the junior levels. The pay is also much better and the bonuses are still all cash (unlike later on) which is a massive benefit.
You make it sound terrible…why do people do it?
I hope I haven’t made it sound too bad, but people really do this job for a variety of reasons…some good and some bad. The training, exit opportunities and experience are unparalleled for those looking to leverage their experience into other jobs or industries. The pay is also incredible for someone in their early 20s. For those who go on to be bankers for life, this is their training ground and where they start to develop the skills and know how that will be useful to them right through their career