Getting Your Start On Wall Street Part I: What The Heck Is A Wall Street Job?

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So you want to go to work on Wall Street. Fine.

But the first thing you need to figure out is what it is that Wall Street does.

As it turns out, Wall Street does a lot of things. 

Unfortunately, there’s very little reliable information on what these things are. Even job seeking MBAs often can’t describe exactly what it is they expect to do when they land a position in investment banking

So we’re putting together a multi-part series on what it takes to get a job on Wall Street.

Let’s get started –>

Investment Banking: M&A and Corporate Finance

The 'investment bank' at an investment bank is staffed by folks who schmooze with corporate clients and put together 'deals.' These deals are generally financings (IPOs, follow-on offerings, private placements) or mergers and acquisitions (M&A).

Within the investment bank, there are different specialties. Most are divided into 'industry groups', that focus on companies in a particular industry (tech, for example), and 'product groups', which focus on a particular type of transaction, like M&A.

Advising clients on mergers and acquisitions has long been viewed as the most elite aspect of investment banking, and most M&A bankers view themselves as the creme de la creme.

You'll be part of a team of a half dozen mostly Ivy League graduates who fly around the world pitching deals and helping corporations buy or sell other companies.

M&A is hugely profitable for Wall Street firms because the fees can be enormous.

Companies need M&A advisers because despite the frequency of M&A deals--the average Fortune 500 company does a big M&A deal every three and half years or so--they simply don't have internal knowledge on how to get deals done. They're too busy operating a business to know how to buy one.

The top M&A shops are Goldman Sachs, Morgan Stanley, Bank of America's Merrill Lynch and Citigroup. There are also a boatload of 'boutiques'--smaller shops that specialize in various industries and compete on service, expertise, and senior-level attention. The boutiques are generally staffed by folks who made their names at the bulge bracket firms.

Investment Banking: Equity Capital Markets

These are the guys who sit between the trading floor and investment bank (figuratively) and actually underwrite new issues of stocks.

Traditionally, the most profitable part of this job was underwriting IPOs. An investment bank gets about a 7 per cent cut of the proceeds from an IPO. Some of these fees go to capital markets, some go to corporate finance (the people who schmooze with the companies and win the business), some go to sales and trading, and some go to the bottom line.

Recently, the IPO market has been all but dead, however. Instead, banks have had to rely on follow-on issuances, which only generate fees that are half as high. (The deals are bigger, though, so you can still make a boatload).

As part of an underwriting team, you'll work closely with bankers, lawyers, sales, and corporate clients to get the deals done.

Investment Banking: Debt Capital Markets

This is similar to equity capital markets but on the fixed-income side (bonds).

The regulatory process of issuing corporate debt is much more streamlined than issuing stock. Generally, the highest margins are in the lowest quality of debt--junk bonds.

For years, the highest profits in debt capital markets came from underwriting mortgage backed securities. Firms tried to vertically integrate the process so that they could originate mortgages, package them into bundles and slice them up into various tranches with different risk profiles. The biggest underwriters of MBS were Bear Stearns and Lehman Brothers, with UBS, Citigroup and Bank of America closely behind them. As you can imagine, there's a lot less of this business than there once was.

As part of a debt underwriting team, you'll work closely with bankers, lawyers, sales, traders, and corporate clients and perform due diligence to makes sure that everything in the prospectus is true. You'll help the company that is issuing stock put together its 'road show.' And you'll price the deal once it becomes effective.

These days the process is made more complicated by the possibility of getting government backing for a lot of different kinds of debt issuances, so you'll also be advising clients about how best to work with the government.

Trading: Fixed Income

Traders buy and sell securities all day. Fixed income traders (debt/bonds) do this in the largest capital market in the world. Despite all the attention paid to the stock markets, the over-the-counter debt market is far, far bigger.

The market is dominated by huge financial institutions who buy and sell securities for institutional investors around the world. Because there is no exchange, the deals are done on a one-on-one basis.

The boom days of fixed income trading are long over. In the past, there were huge spreads in bond prices that allowed the best traders to reap huge profits. These days spreads are tighter and the market far more transparent. Still, this is a huge business for Wall Street firms.

The key skill you'll need to trade fixed income is pattern recognition. You'll need to detect changing demand in different sectors of the debt market. This is one reason information about debt pricing and the number of bidders is so highly prized in this market.

Right now the hottest job in this market is probably trading distressed debt.

Trading: Commodities and Currencies

Trading: Equities

Research

As Wall Street's business model has shifted away from institutional investor client work toward proprietary trading, the big Wall Street firms have slashed their budgets for research. But there are still a lot of analysts, and they still make a lot of money.

Research analysts--both debt and equity--analyse companies, write reports, and otherwise try to help clients (such as institutional money managers) do a better job of managing money. The job involves meeting with hundreds of clients and companies a year, travelling constantly, and making thousands of phone calls. There's also some research and stock-picking involved, but don't delude yourself--it's mostly a client-service job.

Wealth Management

Most of the jobs we've discussed so far are on the 'sell side'--investment banks that buy and sell securities for clients and advise corporations on how to raise money, do M&A, etc. The 'buy side,' meanwhile, is where people actually manage money.

(It's called the 'buy side' because asset managers buy all the securities that the 'sell-side' issues on behalf of clients).

The last big division of an investment bank is sales. Salespeople come in two flavours:

  • Institutional salespeople, who focus on big money managers like Fidelity, and
  • Retail salespeople, a.k.a., stockbrokers, financial advisors, or 'wealth managers'

Within sales, institutional salespeople generally make more money and, arguably, have an easier job. They just entertain and service big clients all day long: Calling about every interesting information nugget, schmoozing, bringing company managers and analysts in to see them, buying fabulous dinners, etc.

Financial advisors, meanwhile, who work in the 'wealth management' departments of firms like Goldman and Morgan are the guys we once called 'stock brokers.' The industry has just wised up and given them a fancier name.

In the past 10 years, brokers have gone from a much maligned part of Wall Street to once again being central to its business. When all the money was being made in investment banking or prop trading, developing relationships with clients and helping to prepare portfolio strategies lost its glamor. Competition from online brokerages also took away a huge piece of this business.

But now that investment banking remains in a funk and the risk of prop trading has been shown to be far greater than expected, brokers are on the rise. Morgan Stanley, UBS and Bank of America Merrill Lynch are all trying to dominate this business. Even Goldman Sachs says it is hiring more people in wealth management.

The roughest part of this job is the 'cold call.' You are basically dialling numbers all day, trying to build a book of business. If you've got the magic touch--or know a bunch of rich people--you can do very well. Otherwise, be prepared for a lot of people hanging up on you day in and day out.

The buy side

The 'buy side' actually manages money. Again, it's called the 'buy-side' because buy-siders buy all the securities produced by the sell-side.

Buy-side firms include:

  • Mutual funds
  • Hedge funds
  • Pension funds

The 'buy side' also, theoretically, includes individuals--namely, you.

The top folks on the buy side, such as Ken Griffin of Citadel (above), make dynastic sums of money. A state employee at a state pension fund, meanwhile, makes chicken feed.

What comes next?

So what's next? Now that you know what all those people with 'Wall Street jobs' do, you need to figure out how you can land one of them.

In the next few days, we'll be following up with concrete advice on how to land an interview, what to do when you get an interview, and how to choose which firm's offer to accept.

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