How to choose an investment bank

Don't go into the business for the fun because, in the early years at least, there may not be any. The fall-out rate is remarkably high. Disappointments will abound. You will be cheated by your superiors on the bonuses that you deserve. You will make some friends among your close colleagues because you will all be thrown in at the deep end and it's best to stick together against the tyrant bosses. But should you implicitly trust your colleagues as you start to move up the career ladder? Not unless you are simple, and certainly not where money is involved.

For reasons which I am not always able to understand - probably they couldn't find another unpaid mug to volunteer - I am quite often asked to talk about careers with a cross-section of professionals, ranging from middle managers to newly qualified MBA graduates.

If you have ever been to seminars on careers, you will know that many can be interminably dull. Headhunters do not generally make very good speakers, for two reasons. First, they have no real option other than to be very optimistic about the industry which dilutes the integrity value of their comments. Second, headhunters don't like to be critical as this may offend a potential client. Please don't think I am saying that executive recruiters are wishy-washy, but they do tend to be depressingly neutral.

I was always taught that speeches were most effective if you followed a strategy of either 'go out there and slay them' or 'take no prisoners'. Therefore, when I talk about careers, I begin by saying that there are only two reasons why a young person should consider any career other than the Euromarkets or the financial services industry. Already I can feel that I have captured the attention of the audience.

The first is if the candidate simply isn't bright enough. The intelligence or awareness levels are so high that an unfortunate intellectual mediocrity shouldn't waste their time applying - join the FSA, a commercial bank, or perhaps become a country solicitor or a politician.

The second reason for rejecting a career in investment banking or securities trading is that you have a genuine vocation or possess outstanding talents in, say, music or the arts. Thank heavens that there are wonderfully dedicated people who wish to pursue no other careers than becoming doctors, nurses or even soldiers. What would we do without such wonderfully conscientious people, and I salute them all.

But if you are sufficiently intelligent to be accepted by an investment bank or a securities trading house, which one, if you were lucky enough to be given the choice, would you select? This question always appeals to the audience because they think, usually with some justification, that you are about to slag off some well-known house or produce a slide (in fact we never use slides) with a title: Do not touch these with a barge-pole or without surgical gloves.

My own view on the selection process is that if you are entering the business to make money and to retire by the time you are 40, you may as well select the houses which pay the most. But who is top of this batting order? And please don't listen to nice folk from the human resources department, because they have never been in the 'big money' loop.

Conventional wisdom says that your first choice should be the Wall Street houses, followed by the European banks and the few remaining British banks with a proper securities business. At the bottom of the scale come the Japanese houses, with the obvious exception of Nomura, where Guy Hands, Max Chapman, Simon Fry and Stephan Ludwig managed to write their own tickets to serious fortunes.

In order to work out the best deal, potential investment bankers and Euromarketeers have to possess more than a working knowledge of the stock markets and an intelligent view of prospects for the industry.

Rule number one for any financially ambitious young person, is never to work for a house which doesn't offer stock options as part of your overall compensation package - only half-wits believe that you can sit at the same table as Sandy Weill of Citigroup or Hank Paulson of Goldman Sachs from just a base salary and a cash bonus.

Rule number two is that your options have to be in stock which will increase in value - would Guy Hands and Simon Fry be as wealthy today if they had ploughed all their earnings into Nomura shares? The Goldman Sachs partners struck gold when the company went public, but before that time they were only rich on paper and some people who are now worth more than $150m (€171m) complained to me that occasionally they were cash-poor.

Also, among the earlier moaning minnies were my friends at the old Salomon Brothers, who constantly whinged about the under-performance of their stock versus, say, Merrill Lynch or Morgan Stanley. They were not impressed when we said that we could never understand why the usually brilliant Warren Buffett bought into Salomon rather than a decent investment bank. In fact, this proved to be reasonably prescient, as it took several years for Buffett to break even on his Salomon investment.

Not everyone can become a partner, or the equivalent, in Goldman Sachs, but there are almost as many multi-millionaires at Morgan Stanley, Merrill Lynch and Lehman Brothers. Bear Stearns may not make more than a tiny ripple in the Euromarkets, but go onto the trading floor in New York and you are looking virtually at wall-to-wall millionaires. How did the Lehman, Morgan Stanley, Merrill and Bear Stearns people get so lucky? In fact, there's no great secret. Since 1987 the shares of these firms have all risen by more than 1,000%.

So which of the North American houses are the pick of the employer bunch today? Merrill Lynch, Lehman and Morgan Stanley all have a possible 'takeover' story - I can't see anyone immediately rushing to buy Bear Stearns, but Warren Spector and Alan Schwarz will probably say that I am talking through my hat. Employees, however, should remember that takeovers may give a fillip to the share price and another financial windfall from exercising options, but you may also lose your job - oh, dear!

Citigroup, which incorporates Salomon Smith Barney, is a magnet for those seeking a financial career and who is there better to portray individual financial success than chairman Sandy Weill, with an accredited net worth of almost $1.5bn? But Citigroup is so large that it may not significantly outperform the overall market indices.

What about JP Morgan Chase? I have written about JPM Chase in some detail and while the bank isn't exactly a dog's dinner, there are problems galore. However, I should remember the advice of one of the very few fund managers whom I hold in high esteem, who said to me almost 10 years ago: 'Undervalued assets tend to smell of fish rather than rose petals.'

Would you want to send your son or daughter to work for one of the continental European or British banks? My advice would be to be very picky. Deutsche Bank would be everyone's first choice because it has not only become one of the premier investment banks in the world, but because its enlightened chairman-elect Josef Ackermann is introducing a scheme which will give additional stock options to top employees in the investment banking division.

Deutsche shares are certainly not expensive and the options could therefore prove very valuable, as well as being a magnet for recruiting new staff. Ackermann is already proving himself to be a visionary, with only limited respect for German national banking traditions. That's a refreshing development, and where Ackermann leads, others will follow.

Commerzbank seems to have survived the eye of the storm and looks to be on a much firmer footing. Might not Allianz, which bought Dresdner Bank, not eventually spin off part of Dresdner Kleinwort? Not today or in six months time, but who knows what might happen in five years.

Employees of both UBS Warburg and CSFB offer managers stock and options in UBS and Credit Suisse respectively. Credit Suisse is a rumoured merger candidate with either Citigroup or Deutsche Bank. Many of the old senior management team at CSFB, under the deposed chief executive Allen Wheat, made personal fortunes of between $50m and $100m, and Wheat himself earned much more.

Under the new management of John Mack, there may be fewer easy pickings, but Mack comes from Morgan Stanley, is a demi-billionaire himself, and understands what financial incentives are required to attract and retain the best talent in the industry. UBS remains quintessentially Swiss, but with a healthy capitalistic ethos. UBS Warburg has always had a reputation of rewarding its managers handsomely and with new American chief executive John Costas, multi-million dollar bonuses will be available on merit.

The only British Euromarket houses that I would recommend without reservation are Barclays Capital and Royal Bank of Scotland. Apologies to HSBC, which is an outstanding global commercial bank, but which just doesn't have its heart in the securities industry.

Barclays Capital has been an outstanding success story under its American chief executive Robert Diamond and, with a rich parent, the world is its oyster. Can you become seriously wealthy by owning Barclays Bank stock options? OK, it may never be similar to winning the jackpot at Goldman Sachs, but nor will you end up on social security.

The French banks aren't as miserly as their reputations - Société Générale didn't mind paying the full asking price for star fund manager Nicola Horlick. However, financial largesse among French bankers has not become a national characteristic. Stock options are not handed out with the same abandon as the Wall Street investment banks - more's the pity, as French bank shares have been outstanding performers in the past 12 months. BNP Paribas is the obvious nap selection among the French Euromarket houses and is one of the few important bank mergers to have been a total success.

I usually conclude my career presentations with an offhand statement such as: 'Any Tom, Dick or Harry worth his salt can make $10m in the Euromarkets with just a reasonable run of bonus luck, but to get to $50m or $100m, you need an equity kicker.' In fact, that isn't so flippant as it sounds. Just look at the richest financiers such as Weill, Charles Schwab, David Komansky, Richard Fuld and the top Goldman partners. You will see that around 90% of their wealth has been created by owning their own stock and, in particular, by exercising stock options.

Will this pattern continue? Don't even think of betting against it, so choose your employer with great care.