Monthly Archives: January 2013

Why are bonuses so much higher in Asset Managers than Investment Banks?

I work with a number of Asset Managers, and often talk to developers who currently work for Investment Banks about making a transition into the buyside. A concern that comes up again and again is the bonus – developers who work for the banks often struggle to believe that the bonus at an Asset Manager really is larger than at a bank. And its easy to see why, after the last 3 years of low to non-existant bonuses, many developers now only value the money in their hand – the fixed income before bonus – rather than promises of a bonus that in their experience may not materialise.

But the fact is that ever since the financial crash in 2008 bonuses across the buyside have remained steady. So why is that?

Regulations
The primary reason that the buyside tends to pays higher bonuses than the investment banks is because the blame for the 2008 crash was landed squarely on the investment banks (although to be honest I don’t remember Northern Rock ever being part of the “bulge bracket”), and since then the banks have been placed under an increasingly heavy weight of regulations – Solvency II, MIFID II, Basel III, and Dodd-Frank are probably the most well known.

This has had a two-sided affect upon bonuses, one is that there is simply less money to go around due to lower profits, and two is that bonus payments are actually being restricted by regulations and the general scrutiny that banks are placed under by the press. Most of this is aimed at the traders and senior management, but the affects have obviously trickled down to all employees.

More money to go around
The fact is that there is simply more money on the buyside than at the investment banks. Not only have hedge funds and asset managers continued to be profitable in the last 5 years (with the notable exception of Man Group), but due to lower numbers of employees working in the buyside the ratio of money to employees is far more favourable. Playing around with some figures (market cap to employees) I worked out that actually BlackRock has a value of around $4 million per employee vs JP Morgan’s $700 thousand.

(I compared the market cap figure because a) it was easy to get hold of and b) it is a good indicator of what the company is valued at. Yearly profit would obviously be a better figure, but profits are released quarterly and I felt I was biting off way more than I could chew by adding them all up – any help would be appreciated!! My full figures below:

BLACKROCK
Market Cap: $39.91bn and AUM: $3.67 trn
Over 9,800 global employees
Market cap to employees: $4,072,448

JP MORGAN
Market Cap: $ 176.54bn and AUM: $1.4trn
Over 250,000 global employees (Figures from the “Report of the Review Committee of the Board of Directors”)
Market cap to employees: $706,160

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A Brave New Banking World

A Brave New World

A technologist I am currently working with tried to post this as a comment on my previous post – I couldn’t work out how to get it on the comments either, but I thought it was posting here:

Indeed, the entire banking sector is recovering. However, several aspects need to be taken into account before being truly optimistic:

 – the regulatory landscape is very different from what it was 5 years ago, and is now imposing new capital requirements which will prevent banks from massively investing in growth

 – clients have been showered with risk suddenly becoming reality. The volumes in equity are still well below what they were before the crisis. They may never come back.

 – more regulation, more risk management, more automation (to cut operational cost) means more IT, meaning that many open IT roles may  simply reveal a change in staff balance, rather than a global recovery. 

On the regulation front I would add that the burden of regulation comes in two forms: less profit and the obstacles it creates for the business

Good news for the start of 2013

I’ve got a feeling that despite all my gloomy predictions at the end of last year, 2013 is going to be a good year for the City of London. I started to think that things might not be as bad as I had thought they would be when within a few days of being back in the office we started to get some interesting roles being released. Now, 17 days into the year we have about as many live roles now as I did at my busiest period at any point last year.

A healthy number of roles is always a good sign, but IT recruitment tends to be a “bellweather” for how the financial markets are doing, as opposed to an accurate indicator. For instance lots of roles in January could just be a sign that it’s the New Year and companies wanting to test the market to see what the quality is like, rather than actually having a need to hire.

Good news from the States means good news for us

But there has actually been some low level good noise floating about since the summer, I refer mainly the Oil and Gas boom in the USA. Their enthusiastic adoption of “fracking” has revolutionised their national energy landscape, which is going to help their economy recover, leading to surprising stories that the US is now a net exporter of oil and that they expect to export more oil than Saudi by 2020 flying around.

The US economy is flying

Then last week I read this article in the BBC news Bank of America to pay Fannie Mae billions to settle mortgage claims. Now that Bank of America, Citigroup, JP Morgan and Wells Fargo have settled their dispute with the US Government (Fannie Mae), the toxic debts they acquired in the lead up to 2007 / 08 will have been cleared off their liability books, which will improve their balance sheets at a stroke, meaning that they can now lend more, pay more dividends and be in a stronger position for the banking standards currently being implemented (i.e. Volcker and the rest of Dodd-Frank). Now they don’t have set aside so much capital to meet these liabilities many of the banks can start chalking up bigger profits.

And today the front page of City AM sees JP Morgan announce, alongside Goldman Sachs, that profits are up 12%. And even better news was that Goldman Sachs recorded a 19% rise in total revenues in 2012. As these two top investment bank do well, we should start to see the other banks also starting to do well. And with all the cost cutting the banks have been doing since 2011, they should be in a place where profits can come quite quickly.

Which can only mean good news for Java developers in the City of London and Finance Technology recruiters like myself. Hopefully this recent spate of jobs will be the beginning of a more successful period than recent years!

On an aside I just can’t help but think what a shame it is that whilst the US banks have been able to sort themselves out, the UK still seems to lag behind. How long do we have to wait for our own banks to move on from the quagmire of 2008?

January

January

Not a great quality photo for January, I’ll try to get a better one later in the month.