Financial services has long been considered an industry where a professional can thrive and work up the corporate ladder to ever-increasing compensation structures. A few career choices that offer experiences that are both personally and financially rewarding are:

  • Accounting
  • Consulting
  • Transaction advisory services
  • Corporate finance

Three areas within finance, however, offer the best opportunities to maximize sheer earning power and, thus, attract the most competition for jobs:

Read on to learn if you have what it takes to succeed in these ultra-lucrative areas of finance.

Investment Banking
Earning Potential
Directors, principals, partners and managing directors at the bulge-bracket investment banks can make over a million dollars - sometimes up to tens of millions of dollars - per year. At the director level and up, there is responsibility to lead teams of analysts and associates in one of several departments, broken down by product offering:

Why do senior investment bankers make so much money? In a word, volume. Directors, principals and partners lead teams that work with high-priced items and make high commissions, since the bank's fees are usually calculated as a percentage of the transaction involved. Bulge bracket banks, for instance, will turn down low-volume work; for example, in some instances, a UBS Securities office will not sell a company generating less than $250 million in revenue if it is already swamped with existing client projects.

Investment banks are brokers. A real estate agent who sells a house for $500,000, and makes a 5% commission, makes $25,000 on that sale. Contrast that with an investment banking office selling a chemical manufacturer for $1 billion with a 1% commission, which amounts to a nice $10 million fee. Not bad for a team of a few individuals - say two analysts, two associates, a vice president, a director and a managing director. If this team completes $1.8 billion worth of M&A transactions for the year, with bonuses allocated to the senior bankers, you can see how the compensation numbers add up.

Job Duties
Analyst (pre-MBA), associate (post-MBA), and vice-president levels are the proving grounds, and the hours can sometimes exceed a hundred per week. Bankers at the analyst, associate and vice-president levels focus on the following tasks:

  • Writing pitchbooks
  • Researching industry trends
  • Analyzing a company's operations, financials and projections
  • Running models
  • Conducting due diligence or coordinating with diligence teams

Directors supervise these efforts and typically interface with the company's "C-level" executives when key milestones are reached. Partners and managing directors have a more entrepreneurial role, in that they must focus on client development, deal generation and growing and staffing the office. It can take 10 years to reach the director level (assuming two years as an analyst, two years for an MBA, two years as an associate and four years as a vice president). However, this timeline is dependent on several factors, including the firm involved and the individual's success at the job. Some banks require an MBA, while others can promote exceptional bankers without an advanced degree.

Key Traits
Criteria for success include:

  • Technical skills
  • Ability to meet deadlines
  • Teamwork
  • Communication skills
  • Career potential

Those who can't take the heat move on, and there is a filtering process prior to promotion to senior levels. Those who wish to exit the banking industry can make lateral moves to corporate finance (e.g., working at a Fortune 500 company, which means making less money), private equity and hedge funds.

Private Equity
Earning Potential
Principals and partners at private equity firms pass the $1 million-per-year compensation hurdle, with partners often making tens of millions of dollars per year. Managing partners at the largest private-equity firms can bring in hundreds of millions of dollars, given that their firms manage companies with billions of dollars in value.

If their investment-banking counterparts handle high-priced items with high commissions, then private equity manages high-priced items with very high commissions. The vast majority go by the "two-and-twenty rule," that is, charging an annual management fee of 2% of assets/capital managed and 20% of profits on the back end.

Take a private-equity firm that has $1 billion under management; the management fee equates to $20 million per year to pay for staffing, operating expenses, transaction costs, etc. Then the firm sells a portfolio company for $200 million that it originally acquired for $100 million, for a profit of $100 million, and so takes another $20 million fee. Given that a private-equity firm of this size will have no more than one or two dozen employees, that is a good chunk of money to go around to just a few people. Senior private-equity professionals will also have "skin in the game," that is, they are often investors in their own funds.

Job Duties
Private equity is involved in the wealth-creation process. Whereas investment bankers collect the bulk of their fees when a transaction is completed, private equity must complete several phases over several years, including:

  • Going on road shows for the purpose of raising pools of investment capital
  • Securing deal flow from investment banks, intermediaries and transaction professionals
  • Buying/investing in attractive, sound companies
  • Supporting management's efforts to grow the company both organically and through acquisitions
  • Harvesting by selling the portfolio company for a profit (typically between four and seven years for most firms)

Analysts, associates and vice presidents provide various support functions at each stage, while principals and partners ensure that each phase of the process is successful. The level of involvement for principals and partners varies at each firm, but they hire the best and brightest pre-MBA and post-MBA talent at the junior levels and delegate most of the tasks.

Most of the initial filtering of prospective investment opportunities can be held at the junior levels (associates and vice presidents are given a set of investment criteria by which to judge prospective deals), while senior folks step in typically on a weekly basis at the investment review meeting to review what the junior folks have yielded.

Principals and partners will head up negotiations between the firm and the seller. Once the company is bought, principals and partners can sit on the board of directors and meet with management during quarterly reviews (more frequently, if there are problems). Finally, principals and partners plan and coordinate with the investment committee on divestiture and harvest decisions, and strategize on getting maximum returns for their investors. If the private-equity firm is unsuccessful at a particular stage, you will generally see principals and partners get more involved to shore up efforts in that phase.

For instance, if deal flow is lacking, then the senior folks will go on a road tour and visit investment banks. At fund-raising road shows, senior private equity professionals will interface with institutional investors and high-net-worth individuals on a personal level, and also lead the presentations. At the deal-flow sourcing stage, principals and partners will step in and develop rapport with intermediaries, especially if it's a new contact and a budding relationship. If a portfolio company is underperforming, you will find principals and partners more frequently on site at the company to meet with management.

Hedge Funds
Earning Potential
Like their private-equity counterparts, hedge funds manage pools of capital with the intention of securing favorable returns for their investor clients. Typically, this money is raised from institutional and high-net-worth investors. Hedge fund managers can make tens of millions of dollars because of a similar compensation structure to private equity; hedge funds charge both an annual management fee (typically 2% of assets managed) and a performance fee (typically 20% of gross returns).

Job Duties
Hedge funds tend to be staffed less than private equity (assuming the same amount of capital managed), and they can have more leeway in choosing how to deploy and invest their clients' capital. Parameters can be set on the front end on the types of strategies these hedge fund managers can pursue.

Unlike private equity, which buys and sells companies typically within an investment horizon of between four and seven years, hedge funds can buy and sell financial securities with a much shorter time horizon, even selling securities within days or hours of purchase. Because of this condensed investment horizon, hedge fund managers are much more involved on a daily basis with their investments (as opposed to private-equity principals and partners), closely following market and industry trends and geopolitical and economic developments around the world.

Being heavily compensated on performance fees, hedge funds can invest (or trade) in all kinds of financial instruments, including stocks, bonds, currencies, futures and options.

The Bottom Line
Getting into a private-equity firm or a hedge fund is brutally competitive. It is virtually impossible to get into these organizations coming straight from an undergraduate degree.

Elite standardized test scores help, along with academic pedigree and leadership activities. A quantitative academic discipline (such as finance, engineering, mathematics, etc.) will be looked upon favorably. Quality of professional experience is looked upon brutally, by a cynical, unforgiving set of eyes.

Many investment bankers contemplating their exit opportunities will often transition to private equity and hedge funds for the next leg of their careers. Those looking to get into private equity and the hedge fund business should work a few short years (between two and four) at a bulge-bracket investment bank or at an elite consulting firm (e.g., McKinsey & Co. or Bain & Co.). Buy-side and sell-side work will be viewed favorably by private equity. For hedge funds, buy-side work at either an investment bank or private-equity firm will be viewed favorably for junior-level positions.

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