Practically everyone is initially drawn to a finance career because of the money, which seems to be all that college students care about nowadays. Most are broke, have a bunch of student loans and do not know exactly what they want to do in life. So the safest and riskless solution is to find the career that pays the most amount of money! How could you ever go wrong making that decision?
Once you get older you will start to realize that there is more to life than just making money. After I cruised through in the early years of my career, I started to realize that making money is not all that cracked up to be, which is one of my Top 10 Things I Wish I Knew in My 20s.
Anyways, I am not here to preach about finding what your passionate about (although towards the end you will realize why a finance career will prevent you from figuring out your passions). The fact is that the traditional finance career path (ie. starting your career in investment banking then transition to the buyside) is the easiest way to be in the top 1% by the time you are in your mid to late 20s.
Before I walk through how much you can actually make an investment banker and as a buyside professional throughout the early parts of your career, I first want to show you how that initial six figure salary straight out of undergrad won’t go very far.
Making six figures in NYC or SF = middle-class income anywhere else
Let’s say you landed a finance / banking job that paid you over $100K right out of undergrad. Initially, you may think that with that pay you will be able to rent out an amazing apartment, buy anything you want and go out to the finest restaurant’s NYC / SF has to offer.
Hate to burst your bubble, but this can’t be further from the truth. Given the cost of living and the high tax rates in these big cities, making low six figures in NYC is the equivalent of a middle-class income anywhere else.
Yeah you can live in the West Village, Flatiron, Greenwich Village or even Tribeca with that pay, but you will be living in a cramped, old apartment with no central AC paying between $1,800 and $3000 per moth.
Typical budget of a first-year investment banking analyst
As a first-year analyst, you typically make a base salary of $85K. Almost everyone lives off their base and banks their bonus. You may think you should be able to save a lot of money each year being single with an $85K base salary, but you can see below that most will basically breakeven.
Now this analysis above is excluding student loan payments. If you have any undergraduate loans, then you may need to cut back on rent and live in a frat-style apartment in Murray Hill for a few years.
I am sure I will get a lot of criticism from people on why you would waste $2,200 a month on rent. Well, that is just the reality of living in a decent place in a decent neighborhood in NYC or SF. Go ahead and live in Brooklyn or Murray Hill or the UES/UWS if you want to, but good luck hanging out with anybody that you know.
Of course, you get that fat $50K bonus payment after your first year. But then you realize that that bonus is less than $30K after-tax.
Now that you realize that six figures is not a lot of money, let’s talk about what you can truly make throughout your initial years in a traditional finance career.
How much do investment bankers make
Analyst:
Analyst pay is very standard across the industry, with small differences between banks. The pay at most varies by $20K-$30K depending on the bank.
A1: $85K Base + $40-$55K Bonus
A2: $95K Base + $45-$60K Bonus
A3: $95K Base + $65-$95K Bonus
The bonus ranges are determined based on your reviews and what rank you received. Usually most analysts receive 1st, 2nd or 3rd (like 80% of analysts). If you are really aiming for top bucket placement (which is what buyside recruiters love), then I suggest you read my 10 Steps to Being a Top Bucket Ranked Banking Analyst.
The differences in pay between buckets is very small (~$5-10K per bucket). Now this may seem like a big difference for someone straight out of undergrad, but once you get older you and stay in the industry, you will realize that $5-$10K is a rain drop in the bucket.
I have known of analysts who were extremely bad at their jobs and basically checked out / pushed back a lot. These analysts get very screwed when bonus season comes as I have known people who have received zero for a bonus because of how bad they were. Usually though, if you are average and can do the work, you will receive at least the 3rd bucket rank.
More and more banks nowadays offer a direct promotion to associate. If you want to stay in banking, then after your second or third year you can get promoted to an A0 Associate (A0 is just for the first six months so your pay is aligned with the calendar cycle). Most places offer a $50K sign on bonus as well so you are incentivized to stay versus jumping to the buyside.
Associate:
Associate level pay is very standard as well. Once you are in your third year as an associate, portions of your bonus will start to be deferred and vest over three to four years.
- A0: $125K Base + $50K Bonus (this is for half a year and may be different depending on the bank)
- A1: $150K Base + Bonus Up to 100% of Salary
- A2: $175K Base + Bonus Up to 100% of Salary
- A3: $190K Base + Bonus Up to 100% of Salary (~30% of bonus is deferred)
You receive a portion of the deferred portion of the compensation each year, most likely in equal installments over four years. This is how they prevent you from leaving for a different bank or job as you will lose all of your deferred compensation if you quit.
How much do private equity professionals make
If you were lucky to get an analyst position in private equity straight out of undergrad, then your pay will be similar to that of an investment banking analyst. Depending on the size of the fund, your all-in pay could be even less than in investment banking.
Typically for associates (after two to three years of banking experience), the pay goes as follows:
- A1: $115-$125K Base + $100-$125K Bonus
- A2: $125-$150K: Base + $125-$150K Bonus
- A3: $150K Base + $125-$175K Bonus (Potential for Carry)
Now for those who do not know what carry is, it is essentially your equity piece in the fund that vests after four or so years. Your ownership is ~50bps to 2% depending on the size of the fund (lower percent cut for larger funds and higher percent cut for smaller funds).
I would not worry too much about carry as it is basically additional upside to your compensation over the long-run and is tied to the performance of your fund. Once you get more senior, the carry becomes a substantial amount of your compensation in private equity.
Read Private Equity Salary and Bonuses – From Analyst to Partner for more detail and the most common private equity interview questions if interested in breaking into the industry.
What about hedge fund compensation?
Hedge fund titles are completely different and the pay is less structured compared to investment banking / private equity. You are called an analyst or senior analyst until you are senior enough to be given your own capital to manage.
Typically, the all-in pay for someone who has two to three years of investment banking experience is similar to that of a PE associate.
However, there are a small number of instances where I have known people who get paid high six figures right after their banking analyst program because their fund had amazing returns that year. This is not the norm so would not salivate over it. I have also known people who make less than they did in banking because their fund had horrible returns.
See Hedge Fund Salary and Bonuses (From Analyst to Portfolio Manager) for a complete overview and most common hedge fund interview questions if interested in breaking into the hedge fund industry.
Different types of hedge funds
There are two types of hedge funds out there: a single-manager fund and a multi-manager fund. The pay structure is likely to be completely different at these two types of funds.
Single-manager fund compensation is more steady with a base plus bonus (just like in private equity), but the upside is likely to be capped at ~$250-300K for your first year after banking.
Multi-manager fund compensation is tied to the performance of your team. If your team has a good year and generates a lot of P&L, then you can get paid upwards of $500K-$1MM during your first few years. However, the flip side is true as well. If your team does not make any money in a given year, then you do not get any bonus and you make less than you did in banking. Read The Basics of Working at a Multi-Manager to learn more about the multi-manager pay structure.
The infamous golden handcuffs
Before I end, I want to make sure you understand one of the biggest problems amongst finance professionals. Most people in this industry got sucked in (including myself initially) because everyone else wanted to do it and we wanted to make a lot of money.
But after working for a few years, you will have paid off all your student loans and will likely have well over six figures saved in your bank account. At this point, you will start to question what you are doing with your life and what you really want to do over the longer-term.
The problem, however, is that once you realize that finance may not be the end-all / be-all solution to all your problems, you start to wonder what if you did something different. But then you realize that you could never do something different because you will have to take a massive pay cut!
These are what are known as the golden handcuffs. Once you are 5+ years into your finance career, you are likely making well over $300K per year. If you ever wanted to do something different outside of finance, then you would have to be okay with taking a >50% pay cut. That’s why a six figure finance career alone will not make your happy.
Lifestyle creep will prevent you from finding your passions
If you experienced lifestyle creep along the way, then you likely will not be able to afford your current standard of living with just a low six figure paycheck. So, you ultimately decide to stay in finance and not try to go find out what you actually really enjoy doing.
While this is a classic rich person dilemma, it is one that is very real and happens to practically everyone in this industry. Make sure to keep all of this in mind when navigating through the early parts of your career.
Love all your posts and talking about some of the topics we can’t ask in informational interviews! Curious to hear what advice you would give to people joining multi-manager funds? How should we prepare to excel?
Many Thanks!
Honestly it is hard to answer that question as every team has a different style of investing depending on the PM. I would say, in general, learn to be okay with being wrong. You will be wrong at least 45 percent of the time if you are one of the top performers, so don’t sweat it if you make a bad call. Learn from your decisions and reflect on what could have been done better/what information you missed/didn’t focus on initially.
Also, try to avoid burning out. I wrote an article on this recently, so I suggest you read that. Make a clear separation between work and home/life as the job can get very demanding given how short term the investment style is.
Also, try to be a contrarian. Don’t follow the herd or pitch investment decisions based on other people’s ideas (unless the idea is not consensus view). There are a lot of crowded hedge fund trades that can really blow up in your face, so be careful once everyone starts to get involved in a stock.
Lastly, watch out for high short interest stocks. They can wipe you out on the short side because of one better than expected quarter. High short interest stocks can move more than 20 percent in a single day and over 50 percent over a short amount of time, so be careful.
Not much you can do to prepare really. All of the learning comes on the job. But you should learn to deal with being wrong 45 percent of the time. Make sure you are honest with yourself and always question your thesis to make sure your investments are not experiencing thesis drift.
Do IB/HF ever pay for lunch/dinner/transport?
Dinners and cab rides home after a certain hour are usually paid for unless you are at a smaller fund.
Most reputable hedge funds pay for your lunch and on flip side MOST do not take advantage of the dinner per diem (after 7-8p usually) because they try to be in the office around that time.
True. Although most (at least at the multi-managers) come home around 7pm and work remotely.
What do you think are the type of people who succeed in IBD vs PE vs HF? I have been an ardent follower of your posts and think they are fantastic.
I am currently a first year BB analyst at a coverage group. I did a lot of investing in college, including a ton of stock pitch competitions but to be honest reading about stocks/ Buffet’s letters doesn’t really interest me.
What are the common traits of people who succeed in IBD vs PE vs HF? I feel like my strengths are my interpersonal skills, oratory skills and just a general ability to get things done while my weaknesses are working in unstructured settings. Would really appreciate any advice
Extroverts tend to stay in investment banking or go to private equity while introverts move on to hedge funds. Hedge fund work life is usually a lot more unstructured, where your job is primarily to build models, read filings, talk to management teams and stay on top of research.
Since you have good interpersonal/oratory skills, would stick to IBD and PE. Client related work in IBD and structured deal teams in PE probably the best fit for you.
Thanks a lot for the insightful response as always.
A quick follow up- how would you go about judging fit for IBD vs PE? Would it just be a general preference for investing over primarily execution work which would lend to someone being more succesful in PE over IB? Honestly I have been enjoying my team in IBD and have a good route given my rep in the group (one of the best performing groups on the street) so unsure if I want to sacrifice that. Thanks again!
A lot of analysts right out of college hate on IBD and say buyside is the best route. If you really like your group, the work that you are doing, and think you have the skillset to develop relationships with clients as you get more senior, then stay in IBD. The problems with IBD is the work gets a little repetitive after 2-3 years and not as challenging anymore. If you don’t mind that then definitely stick to IBD. If you prefer to be an investor and think about the fundamentals of businesses and growth prospects of industries, then go PE.