As you consider the myriad of options in financial careers, from financial planning and portfolio management to corporate finance and trading, you shouldn't be too afraid or too uninterested to consider working with the fixed-income asset class, or even making it your chosen area of expertise. Because fixed-income securities are more widely owned than stocks or funds, you can make yourself more marketable for the future, while at the same time widening the net for that all-important first job in the field. Read on to find out why working in fixed income can be your ticket to the highest professional goals you've set for yourself.
The Benefits of Bonds
Bonds are often thought of as a "ho-hum" asset class, but there are a lot of benefits to becoming an expert in the bond markets, which dwarf the equity markets in size. These securities provide dependable, steady returns and form the backbone of the entire investment process. For you, it could be the right path to a much broader base of clients or potential employers, while learning invaluable skills, like how to diversify a client's assets and mitigate risk.
What Is Fixed Income?
Over hundreds of years, fixed income has come to mean more than just bonds, and the innovations have really sped along in recent decades. With the advent of electronic trading and increasing globalization in the financial markets, fixed income also has very few borders. In addition to U.S. Treasury-based and foreign currency-based sovereign bonds, fixed income includes preferred stocks, corporate bonds and municipal bonds.
A whole different class of securities comprises what is known as structured finance. In this group are mortgage-backed securities (MBSs), collateralized debt obligations (CDOs), and many other acronym-laden securities whose underlying cash flows are generated by everything from cars to building leases, bridges and toll booths.
Lastly, there is a host of derivatives based on one or more of the above, such as credit-default swaps, options and futures. All told, according to the Bank for International Settlements, fixed-income securities represented more than $70 trillion in value worldwide in 2007, more than the aggregate market cap of every stock on the planet!
What Types of Tasks to Expect
Fixed-income jobs can deal with any part of the research, trading, analysis, presentation or creation of the securities described above. If you have ambitions of becoming a true asset manager, whether for individual clients or a mutual fund, you'll need to be just as comfortable choosing an individual bond as you would an individual stock or fund. The following jobs can all give you a head start:
Research and Trading
Research jobs would involve searching for fixed-income products to meet the needs of your client or employer, and are highly analytical in nature. You'll be given a set of parameters and desired risk levels, and use a broad base of fixed-income knowledge to weigh the merits of potential investments.
These tasks are sometimes intertwined with those of the trader, who will work with multiple brokers to purchase and sell securities. Trading may happen on the open market (as with most Treasury, corporate and municipal bonds) or in private sales between corporations, banks, brokers and insurance companies. Compared with equities trading, fixed income often involves a lot more legwork and person-to-person contact because of liquidity constraints and a generally fragmented marketplace.
If you land a first job with a portfolio manager like a mutual fund or registered investment advisor, you'll get a chance to learn core concepts like bond laddering for individual clients and credit-quality studies of specific bonds. Credit-quality analysis provides exposure to both equities and fixed income; to know if a corporate bond is a solid investment, for example, you'll need to analyze the company's cash flow generation, interest coverage and long-term earnings clarity.
Portfolio managers are found at mutual funds, private-equity firms, hedge funds, pension funds and insurance companies, just to name a few. While you won't land a job managing a billion-dollar fund right out of the gate, working under a portfolio manager will open a window to broader understanding of fixed income's place in a diversified portfolio.
Sales and Brokerage
Sales and brokerage jobs will involve marketing fixed-income securities to clients. You will normally need to be licensed before being able to sell, and you will likely receive customized training from your employer regarding the specific kinds of securities in their inventory. In order to be successful in a brokerage setting, you'll need to learn more than just the boilerplate terms for bonds and structured-finance products - you'll need to understand how the bond markets work and the features of a wide variety of competing or similar securities.
Sell-side brokerage firms (like Merrill Lynch and Morgan Stanley) employ huge sales forces for both individual clients and institutional investors. Investment-banking groups also use brokers to market new debt issues to clients, but these jobs demand a higher level of experience and background.
Back Office and Accounting
Many admirable career paths have been initiated through various back-office functions like accounting, and position and cash settlement and reporting. Some of these jobs may be easier to nab right out of school, but they still provide a window to learn a lot about how fixed-income securities are priced, traded and valued, and what functions they serve for their investors.
If you show an aptitude and enthusiasm for the securities you're working with, you could gain an opportunity to work in a position with more hands-on experience. Because of a general lack of interest (especially among younger professionals) in the asset class as a whole, there are ample opportunities to work upward from within.
Educational Background and Requirements
To pursue the types of careers discussed here, the surest starting point is a college degree in a field like accounting, business, economics or finance. Post-graduate degrees like an MBA can give obvious advantages in the early going, but professional designations like a CFA or CFP are only available after years of real-world experience, and are often sponsored and/or funded by your employer (who will be eager to tout your higher credentials). Both the CFA and CFP exams place a high emphasis on fixed-income knowledge, so if you desire these you'll need to get your experience early on.
The ideal skill set of a fixed-income professional includes:
- a strong analytical and mathematical mind
- the ability to think on the fly
- a patient, deliberate sense of detail
The world of fixed income comes with its own vernacular that must be learned and utilized, and there is a high rate of technical savvy among the higher ranks of the field because of the emphasis on electronic trading and analysis.
Opening Doors to Opportunity
There are many benefits to going the fixed-income route. In addition to making yourself more broadly marketable, fixed income can be a safe haven in a weak market environment. Many stockbrokers get laid off when a bear market hits, but fixed-income pros can usually weather the storm. In fact, business in fixed-income securities may boom when stock markets turn sour as investors flee to safer alternatives.
For anyone who seeks to one day manage a large pool of assets or work for wealthy clients, a mastery of fixed-income fundamentals is a must. You'll gain the depth of understanding necessary to manage a diversified portfolio, especially for retirement-age clients and older. These clients hold a disproportionately high share of fixed-income securities because of the safety they offer and their predictable income. If you want to gain entry into the baby boomer demographic, fixed-income experience is the surest path.
For young professionals who want to keep their career paths open and broad, consider getting early experience with fixed-income products. You will be able to deepen your understanding of stocks and other asset classes while gaining experience in the most widely held and stable asset class available. With so many different types of securities to choose from, you can either decide to specialize in a single area of fixed income, or use your time as a springboard into broader careers in portfolio management and financial planning.