Trends: A Cyclical and Highly Competitive Industry

If you're looking for a slow and steady career where you progress predictably up the corporate ladder and pocket an engraved watch when you retire, the financial industry is not for you.

A career in investment banking follows a path something like the lifecycle of a butterfly: You'll have to do your time as a grub (analyst/associate) before you morph into a triumphant winged

creature (managing director). Successful managing directors earn fortunes and can retire young, but the unsuccessful at any level are crushed early on. And throughout your life, your career

is susceptible to fits and starts, depending on the phase of the economic cycle.

The financial industry is both highly competitive and highly prone to the ups and downs of the global economy. There are few other industries where tens of thousands of graduates apply each year for just a few thousand places and where you can make millions by your mid-30s. At the same time, few organizations are as ruthless as investment banks and securities firms at downsizing when business stalls.

Only the Best Succeed (and Get Big Bonuses)

Investment banks pride themselves on being meritocracies. This means two things. First, you won't move up - or keep your job - unless you're very good. Following annual talent reviews, firms like Goldman Sachs regularly cull 5% or more of their worst-performing staff. Goldman Sachs' Business Principles, listed on their corporate website, state: "We offer our people the opportunity to move ahead more rapidly than is possible at most other places. Advancement depends on merit and we have yet to find the limits to the responsibility our best people are able to assume."

Second, you won't become a multimillionaire unless you also bring in millions of dollars of revenue to the firm and land a big bonus. Most investment banks cap salaries at around $250,000 and bonuses for top performers add hundreds of thousands, or even millions more, to annual salaries.

"Financial service firms have suppressed salaries in favor of performance-related bonuses for the last twenty years," says Alan Johnson, a New York-based expert on investment banking pay structures. "If you're a senior person, less than 20% of your pay is base salary, and the rest is down to performance. At junior levels it's likely to be 50-50."

Hiring and Firing

The potential to be paid phenomenally well is the upside to a career in finance. The downside is the risk of losing your job.

Financial companies have a reputation for hiring wildly when things are good and firing just as wildly when things are bad. The rash of layoffs in the years after 2000 followed a manic hiring

spree in the late 1990s. In 1996, for example, worldwide headcount at Goldman Sachs was 6,000; by 2001 it was 25,000, and by 2004 it was down to 20,000. Merrill Lynch reduced its headcount by 24,000 in two years in the early part of the decade and as of 2004 had 48,100 employees worldwide.

Those going into the business should be aware that the industry has a flexible approach to recruitment. To avoid being left high and dry, would-be investment bankers should develop strong

transferable skills relevant to other industries or sectors. Working for companies with established brand names also helps build a more impressive resume, leaving you better placed to find a new job when necessary.

Graduate Recruitment: A Variable Flow

The industry's flexible approach to hiring extends to graduate recruitment. When times are hard, companies might cut recruitment to little or nothing in some divisions. When times are good, there's a graduate hiring bonanza.

The best known hiring spree was in 2000, when financial companies dramatically increased their hiring and boosted pay by as much as 50% in an effort to compete with dot-coms. Over the

next two years, graduate vacancies fell 25% and students found it increasingly hard to secure jobs.

The good news is that by mid-2005, things were looking fairly promising for graduates. In late 2004, business schools reported that investment banks and management consulting firms were more aggressively recruiting MBA graduates in comparison to prior years. Several banks are expecting to increase their 2005 intake by around 30%. Whether or not this trend holds true for 2006 remains to be seen.

Hot Sectors

Bearing in mind the roller-coaster nature of the financial business, it's worth giving some thought about where you want to work. Fixed income? Equities? Corporate finance? Choose carefully:

You're not just selecting a job, you're positioning yourself in an industry where some sectors are healthier than others.

Ted Moynihan, a partner with management consulting firm Mercer Oliver Wyman, lists two factors to consider when choosing where to work: the economic cycle and a sector's long-term growth prospects.

"Different points of the economic cycle will favor some divisions above others. However, several areas of the financial services industry are benefiting from underlying structural growth, regardless of the point in the cycle," he says.

Which are the areas currently experiencing either long term or structural growth?

Structured Products

This is where demand for people is hottest right now - and it's likely to remain this way for the foreseeable future. Structured products are complex derivative instruments based on underlying

stocks, bonds, currencies or assets. At their most simple, they might be futures, in which a buyer acquires the right to purchase a financial product at a specified future date and a specified price.

A more exotic structured product might be first-to-default baskets, which allow buyers of protection to hedge themselves against market-to-market risk as well as broader default risk.

As a rule of thumb, the more complex the products, the greater the demand for employees, both those who can work on existing products and develop new ones. Most banks are interested in hiring structured product specialists. According to Forbes.com, "the most sought after candidates at banks are people who specialize in derivatives and other structured products, as well as merger advisors."

Recruitment is being driven by the pursuit of better investment returns: Equity markets have performed poorly in recent years, and debt products haven't been great either. Derivatives based

on underlying debt and equity products have been one of the only ways for investors to achieve high rates of return.

If you ultimately want to work with structured products, you should train in a sales, trading, or capital markets role. If you go into operations, you could also end up clearing and settling derivatives transactions. Traders who work with structured products will typically need a Master's degree, or even a PhD, in a mathematical subject.

Leveraged Finance

Recruiters also report a rash of interest in leveraged finance specialists. Leveraged finance refers to debt raised by companies typically considered below investment grade by ratings agencies like Standard & Poor's (see the Ratings Agencies and Information Providers sector profile for more detail). Leveraged debt is typically secured against a company's assets.

Leveraged finance teams in investment banks help put the debt package together.

Demand for leveraged debt is high and there are lots of jobs available. Unfortunately, most positions require a few years' experience. If you want to break into this sector, you should start out in credit analysis or corporate banking. Accountants can also move into the sector.

Compliance

Another area of persistent hiring is compliance. Greater scrutiny by the world's regulators is prompting securities firms to hire more staff to help keep their departments on the straight-and-narrow.

Marie Rice, a senior consultant at Jay Gaines & Company, Inc., a Manhattan-based financial services recruitment firm, says that compliance is definitely a growing sector. "Not only is there a

premium for compliance people now, the job of compliance is getting bigger," she says. "The market is demanding, more than ever, people who can sort through the complexity of the law and

translate that into the specific initiatives across the corporation."

Firms such as Goldman Sachs and UBS run graduate training programs for compliance specialists. Other routes into the area include law or working in the regulatory division of a large accounting firm.

Private Banking

Private banking is also looking like a growth sector.

"Wealth is driving demand for brokers in the U.S. market," says Harry Pilkington, a search consultant at Armstrong International who covers the U.S. market out of London. "Merrill Lynch, UBS, Deutsche Alex. Brown, Smith Barney - all the big brokerage houses are hiring."

Strong demand is pushing up prices. Private client brokers are typically paid 30%-40% of the fees they generate. This can amount to $2 million or more. To encourage top people to join, Pilkington says some houses are offering upfront payouts equivalent to a year's commission.

If you want to go into private banking, try to start in a bank like JPMorgan or Goldman Sachs, which are known for training private bankers. Or you could complete a few years' training as a corporate financier, capital markets banker or fund manager and then move across departments.

Hedge Funds

Finally, despite the tribulations surrounding recent poor returns and fund closures, the hedge funds sector is still fairly hot. You might not be able to go in as a fund manager, but there's plenty

of demand for people to work in hedge fund risk management, compliance, or information technology.