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| For new MBA students, time to review where opportunities are prominent in financial services. |
Some, the first-years, are gleeful, excited and anxious about the new days ahead, new courses, new contacts, and new relationships with professors, deans and career advisers. Some, second-years, are still hopeful that summer internships, including the celebrated networking receptions and occasional work on deals, will turn into offers any day now.
Both groups, whether they head back to campus at Darden, Tuck, Ross, Marshall or Haas, know they need to allot the right amounts of time to make career and employment decisions. Corporate-finance case work is important, and so are finance-club duties and public-policy presentations. But trying to decide where to go by next summer is crucial, too.
As we head toward the latter days of 2016, let's update where the state of opportunities among sectors of finance. Let's peek and highlight where banks, funds and financial institutions have elected to expand (or not), grow (or not) or support (or not).
Opportunities, in general, seem bright, if only because capital markets, while occasionally volatile and uncertain, are stable these days, notwithstanding ongoing uncertainty about where interest rates are headed. Market experts know well that with a finger snap, markets can misbehave, volatility can surge and financial institutions will retreat and tighten up as quickly as winter will inevitably approach.
This follows reviews and assessments from late, 2015, and early, 2016.
Corporate treasury: STABLE/POSITIVE
If companies are growing, expanding and investing in new businesses, then such growth or new assets must be funded. New cash generated from growing business operations must be managed or reinvested. Hence, corporate-treasury and finance functions (at non-financial institutions) are active, tapping into resourceful ways to finance the business and reduce financing costs or assisting senior managers in deciding how best to deploy cash on hand.
Many big companies (the familiar Fortune 500 names, for example) continue to try eke out higher returns and bolster stock prices by taking advantage of cheap debt and continuing to repurchase stock. That keeps corporate-finance types busy, too.
Many other big companies choose to hoard millions/billions in cash, taking precious time to decide the right investment opportunity (if they choose not to buy back stock to boost market values). That keeps them busy, too. Other finance managers are actively involved in hedging balance sheets and earnings against interest-rate spikes or unforeseen currency movement (similar to "Brexit" fluctuations, e.g.).
Investment banking: STABLE
Investment bankers are in satisfactory moods these days. Deals are in the pipeline, mergers and acquisitions continue to bloom, and these might be good times to spark up the IPO engine. Big companies continue to issue cheap debt and buy back stock--under the guidance of bankers. Other companies are always on the prowl for the next right acquisition--also guided by bankers. A technology bubble burst was projected by naysayers earlier this year, but it hasn't happened yet. Technology bankers, however, haven't been successful in convincing many familiar "unicorns" (Uber, AirBnB, e.g.) to go public.
With banking, a lot depends on the sector: healthcare, consumer goods, real estate, energy, financial institutions, diversified, industrials, technology, media, pharmaceuticals, etc. For much of 2016, energy has been the untouchable (oil and gas exploration, most notably), but activity in many ways is still brisk in pharmaceuticals and some technology segments.
Boutique firms continue to form, sprout, spread and make an impact. And companies, large and small, won't hesitate to be advised by small outfits still unpacking boxes in a new Park Avenue office.
The big I-banking names, however, continue to push hard in banking, because investment-banking fees are more valuable than ever--fees from advising, underwriting, committing, processing, managing, arranging, and syndicating. The big names (including Goldman, Morgan Stanley, Citi, Bank of America, and JPMorgan) haven't curtailed their investment-banking strategies.
Some foreign banks (Deutsche Bank, Credit Suisse, e.g.) are having second thoughts, as they seem to do every other year. Other names (like Wells Fargo and other foreign-based banks) start, stop and resume in the sector, but still command respect in certain niches. Barclays this year, with many prominent hires in the senior ranks, appears to be regrouping to prepare to compete fiercely with the big names.
Some foreign banks (Deutsche Bank, Credit Suisse, e.g.) are having second thoughts, as they seem to do every other year. Other names (like Wells Fargo and other foreign-based banks) start, stop and resume in the sector, but still command respect in certain niches. Barclays this year, with many prominent hires in the senior ranks, appears to be regrouping to prepare to compete fiercely with the big names.
Private banking and private wealth management: POSITIVE
For more than a decade, financial institutions have adored wealth management as a business line, partly because of the stable, predictable fee-income streams and partly because the related activities come with manageable risks and manageable balance-sheet requirements. This, along with other asset-management businesses, has been a targeted growth area.
Results have been satisfactory at most banks, and growth might not have soared as they had hoped. But it's still a preferred area, as banks prefer to grow in sectors where capital requirements aren't onerous and where balance-sheet impact is tolerable.
Competition, however, is fierce--and not necessarily from other large institutions. Robo-advisers have surfaced and claim to provide the same banking, wealth management and asset management services for much lower costs. Financial institutions now fend them off or try to convince clients they aren't better off retreating toward algorithmic-driven online advisers. The robo-segment will likely seize younger clients and those just starting to build wealth. Banks must decide a strategy of how to react: Compete or form partnerships.
Corporate banking: STABLE/POSITIVE
Regulators like it when banks go back to basics--deposit-taking and loan-making. With more and more restrictions and with banks' hands tied in knots, corporate banking appears more attractive than banks' pre-crisis efforts to engage in the exotic in those go-go years. Banks appreciate the corporate relationships and more stable net-interest-earned revenues that come with corporate banking.
Boosting this business helps boost revenues and potential transactions in investment banking. The two go hand in hand now. In fact, many big banks combine the sectors. It's more common to see the sectors named "Corporate and Investment Banking." The banking group that can issue the bonds on behalf of a big company will likely be the same group that can arrange a billion-dollar syndicated loan.
Boosting this business helps boost revenues and potential transactions in investment banking. The two go hand in hand now. In fact, many big banks combine the sectors. It's more common to see the sectors named "Corporate and Investment Banking." The banking group that can issue the bonds on behalf of a big company will likely be the same group that can arrange a billion-dollar syndicated loan.
Corporate banking, nonetheless, comes with big risks. Some of the biggest losses banks have absorbed over many decades have resulted from bad risk management or aggressive corporate lending in certain industries.
Thus, while they beef up corporate-banking units, they must concomitantly beef up risk management and suffer the headaches (and capital requirements) that come with big loans to big companies.
Thus, while they beef up corporate-banking units, they must concomitantly beef up risk management and suffer the headaches (and capital requirements) that come with big loans to big companies.
Sales and trading: NEGATIVE
The outlook for those interested in working on trading desks is negative, but that doesn't imply there aren't opportunities to sell and trade securities, derivatives and currencies profitably. As long as there are thriving capital markets, there are opportunities to trade for gains.
But financial institutions continue to review and rationalize sales-and-trading businesses. Senior managers are still determining what their roles should be and what the right business model will be. Some institutions are deciding whether computers and machines can substitute for the roles of humans on trading desks consummating large equity or bond sales/trades with other institutions.
Regulation has restricted what they can do or how they can do it. Profit opportunities are fewer. Dodd-Frank's Volcker Rule (which prohibits proprietary trading at banks) is in place. Some banks have scaled back; other big banks continue to hold big positions (to facilitate customer flow), while they struggle to ensure compliance with new rules. Some determined banks have found ways to be profitable, but most banks aren't seeking to expand these areas aggressively. Hiring occurs, but not in the way it did before 2008.
Regulation has restricted what they can do or how they can do it. Profit opportunities are fewer. Dodd-Frank's Volcker Rule (which prohibits proprietary trading at banks) is in place. Some banks have scaled back; other big banks continue to hold big positions (to facilitate customer flow), while they struggle to ensure compliance with new rules. Some determined banks have found ways to be profitable, but most banks aren't seeking to expand these areas aggressively. Hiring occurs, but not in the way it did before 2008.
Risk management: POSITIVE
Risk management opportunities continue to grow, even if banks have not figured out the best ways to recruit talented MBA's in finance into these areas. For the most part, risk management has become a complex responsibility. At major financial institutions, it is now sub-divided into several areas: market risk, liquidity risk, credit risk, operations risk and now even such areas as reputation risk and enterprise risk.
Many financial institutions seek what they need in mid-level and senior roles by convincing bankers and traders to assume risk positions. Some banks have tried hiring junior risk managers and developing them through the years, as they take on more responsibility.
Risk management, like it or now, now encompasses regulatory compliance. The new rules have become voluminous, arcane and difficult and are often tied to how a financial institution quantifies and manages risks. The best risk managers are now expected to understand new regulation, as well as understand clients, borrowers, counterparties, markets, financial modeling and analysis, and (more and more) advanced levels of statistics.
Banks have always encountered the fact that few colleges and business schools offer courses in financial risk management, if only to give students an idea of what risk management is all about. So when they recruit, they must convince prospects of the importance of such roles (and of course pay them as if they would pay bankers and traders).
Yet year after year, most institutions are desperate to find the right people to fill critical roles.
Asset management: POSITIVE
Like private wealth management, asset management is a targeted growth area. Financial institutions (including banks and some insurance companies) scramble to accumulate investors' assets (ranging from individuals to institutions and mutual funds) and charge fees for holding and investing them, based on criteria.
The arena is crowded and now includes the aforementioned robo-advisers. Because it's crowded, institutions must offer competitive pricing or offer a bundle of services under a price sheet. Robo-advisers claim they can provide much of the service bundle at much lower cost.
Like private wealth management, banks are attracted to asset management's minimal regulation: Not much capital is required to appease the Federal Reserve when managing a billion dollars. The fees and a tolerable amount of regulation keep some banks pushing harder to expand and grow, although performance has reached a plateau in recent years.
Investment research: STABLE
Research applies to institutional equities and fixed-income ("sell side") for broker/dealers and may apply to the same ("buy side") for asset managers.
After years of trying to fix the business model of equity and bond research (after scandals during the dot-com-bubble era), the industry seems to have settled into something that works for many institutions. Debt investors still examine credit ratings from ratings agencies. Equity investors and traders still seek guidance on company stocks and embrace the research and valuations researchers offer. Those researchers are still paid from the commissions their firms generate from equity-trading activity. And many investment managers will still do some credit and equity research themselves.
While an MBA in finance is an advantage, many institutions like what the CFA adds.
Venture capital: POSITIVE
At the start of 2016, many suspected we might be on the brink of a technology bubble, a bubble that could burst the apparently inflated stock values of new companies and burst the enthusiasm of venture-capital companies supporting any start-up that has a heart beat.
But the bubble hasn't burst yet. The industry proceeds, however, with both caution and optimism.
For opportunities for MBA's, the challenge is always the same even when the going is good: Finding a way to get through the front doors of a closed-off, clubby world.
Private equity: STABLE/POSITIVE
Private equity differs from venture capital in one important way. Both industry segments invest in and manage operations in private companies. Venture-capital firms focus on the unknown--new company, new managers, a vision, new products or services, almost no track record. Private-equity firms focus on the known--often old companies, experienced managers, old products and services, a withering brand, long track records, and often a worn-out vision.
Venture-capital firms determine a business model and find new ways to generate revenues and cash flow. Private-equity firms often invest in companies with sound revenue streams, but focus on streamlining operations, reducing costs efficiently, and exploring new markets or channels. At some point, when timing is right and after companies are spruced up, they consider selling those old companies back into the public markets.
There is an argument that private-equity firms thrive when equity markets are down, the better for them to discover and buy under-valued companies. There is another argument that private-equity firms thrive when equity markets soar, the better for them to consider selling refurbished companies back to the public market.
When business is brisk and opportunities exist, private-equity firms are always stalking banks and business schools to find the hordes who will do the complex finance models to determine when to buy and when to sell.
Hedge funds: NEGATIVE
Might these be the worst of times for hedge funds?
Hedge funds have experienced horrible returns and times the past two years. Many have shut down, closed shop, and returned money to disappointed investors. Some updated statistics show as much as 15-20% in redemptions, partly reflecting dismal performance when other market indicators are doing well, partly reflecting frustrations at investors paying fund managers the proverbial 2-and-20 fees (2% asset fees and 20% of fund profits) for almost embarrassing outcomes.
These would also include activist-shareholder funds, funds that do less frequent trading and are more involved in building equity stakes in notable companies to drive a new financial strategy (merge, acquire, expand, change business model, pay more in dividends, reward shareholders better, reconstruct board membership, conduct stock buy-back campaigns, etc.). Some have had satisfactory results; some, too, have had weak returns. Others have just merely withdrawn their relentless efforts to force the new strategy.
Many hedge funds, therefore, aren't opening their doors widely to new candidates fresh from business school.
Hedge funds have experienced horrible returns and times the past two years. Many have shut down, closed shop, and returned money to disappointed investors. Some updated statistics show as much as 15-20% in redemptions, partly reflecting dismal performance when other market indicators are doing well, partly reflecting frustrations at investors paying fund managers the proverbial 2-and-20 fees (2% asset fees and 20% of fund profits) for almost embarrassing outcomes.
These would also include activist-shareholder funds, funds that do less frequent trading and are more involved in building equity stakes in notable companies to drive a new financial strategy (merge, acquire, expand, change business model, pay more in dividends, reward shareholders better, reconstruct board membership, conduct stock buy-back campaigns, etc.). Some have had satisfactory results; some, too, have had weak returns. Others have just merely withdrawn their relentless efforts to force the new strategy.
Many hedge funds, therefore, aren't opening their doors widely to new candidates fresh from business school.
Compliance and regulation: POSITIVE
Dodd-Frank has been in force for more than a half-decade. Financial institutions continue to do all they can to understand, interpret, analyze and comply with the thousands of pages (yes, thousands) of new rules. Many rules under Dodd-Frank and Basel III are still in formation, still in draft form. So banks must be ready to comply with regulation that has still not been written in entirety. Or they must work harder to improve the metrics that show they have excess levels of whatever is required--capital, liquidity, stable funding, cash reserves, etc. They must survive complex annual stress tests and prove their demise (even if it won't happen soon) won't damage the financial system.
Compliance and regulation are now beastly tasks that require attention, investments (for systems), and expertise (in the rules, in statistical analysis, or in organization structures). And they must be explained to bankers and traders in a way to help them understand the impact on their businesses and their dwindling returns on capital.
They must prove (based on new quantitative tests of their roles in the financial system) they aren't "too big to fail" or suffer the onerous regulatory requirements that come with being global, colossal institutions.
Many large institutions will admit they don't have sufficient enough people who willingly and eagerly want to be involved in ongoing compliance. Those doors are as wide open as any door in a bank is these days.
Financial technology: POSITIVE
If there's a hot sector for the times, it's financial technology--or fin-tech. The time is ripe where the worlds of technology, new ventures, and financial services are locking hands to create something new, or at least "disrupt" the traditional ways of providing financial services, advice and funding.
Fin-tech presents innumerable opportunities. While the trends are upward and show promise, the sector is too broad and too unpredictable to pinpoint how young professionals can best take advantage of opportunities. Fin-tech includes electronic payments, small-business lending and robo-advising in wealth management, but it may also include mergers and acquisition, investment research, and financial reporting.
Companies have formed everywhere, not just in Silicon Valley or on Wall Street. Companies have been started by computer experts and former bankers and traders.
A few themes are emerging: Big institutions have taken notice and are responding with their own strategies (and investments or partnerships). As with most new ventures, not all fin-tech businesses and models will survive. Many won't be able to expand in scale. Others will make mistakes not in technology, but market strategy or risk management. Most will require time to perfect a business model (how to provide financial services, funding, or advice profitably).
But all that won't diminish opportunity in the early days of what might be called a financial revolution of sorts.
If there's a hot sector for the times, it's financial technology--or fin-tech. The time is ripe where the worlds of technology, new ventures, and financial services are locking hands to create something new, or at least "disrupt" the traditional ways of providing financial services, advice and funding.
Fin-tech presents innumerable opportunities. While the trends are upward and show promise, the sector is too broad and too unpredictable to pinpoint how young professionals can best take advantage of opportunities. Fin-tech includes electronic payments, small-business lending and robo-advising in wealth management, but it may also include mergers and acquisition, investment research, and financial reporting.
Companies have formed everywhere, not just in Silicon Valley or on Wall Street. Companies have been started by computer experts and former bankers and traders.
A few themes are emerging: Big institutions have taken notice and are responding with their own strategies (and investments or partnerships). As with most new ventures, not all fin-tech businesses and models will survive. Many won't be able to expand in scale. Others will make mistakes not in technology, but market strategy or risk management. Most will require time to perfect a business model (how to provide financial services, funding, or advice profitably).
But all that won't diminish opportunity in the early days of what might be called a financial revolution of sorts.
Tracy Williams
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