Are MBAs turned off to Investment Banking?

In the past two weeks, national media outlets hopped on a storyline, proclaiming that MBA students and graduates in finance have reached a boiling point of discouragement in investment banking and other activities in financial services.  The Financial Times and CNBC reported last week that MBAs at top schools are somewhat turned off to investment banking as a long-term career, at least based on hiring patterns the past few years. Yahoo reported similar trends last week.

The Financial Times reported the dimming in popularity of banking and finance in Wharton's recent MBA classes.  In the past three years, the percentage of graduates entering banking has declined from 25% in 2008 to 16% in 2011.  At Harvard, MBAs choosing banking declined from 10% of its class to 7%.

Are MBAs turned off? Or are they scared off? Are they turning away, or are they looking more closely at alternatives--like consulting and entrepreneurship?  Is there a campus backlash toward the industry? Or has the industry done a poor job of attracting and retaining graduates? Are the numbers a misrepresentation of what might be occurring--that banks have become imprecise, whimsical and peculiar in their hiring processes?

The general consensus among students, graduates and perhaps deans and faculty is likely this:  MBAs are not necessarily turning away from investment banking, as much as they might be fatigued at the industry's not being able to determine where it is going from here.

Faced with regulation, reform and not an inkling's notion of new sources of stable revenues, the industry has wavered in recruiting, hiring, development and retention. Discouraged MBAs are likely turning to other industries that can at least promise with some conviction a career path, upward mobility, a healthy environment, and--to say the least--a job for the next 3-5 years.

Each year, including at Consortium schools, thousands of new MBA students declare a possible interest in investment banking. As they learn more about industry uncertainty, they pay attention to exciting appeals from other industries. Little by little, they turn elsewhere--to industrial companies, to start-ups, to consumer companies, or to consulting.

Consulting continues to be a popular alternative, even while consulting and investment banking share common experiences--long hours, project orientation, client immersion, tight deadlines, industry specialization, compensation tied to incentives, prestige, and demanding clients. The consulting firms, it seems, have been more successful in recent years in offering a more defined, more predictable, and more certain career opportunity.

Investment banks, no doubt, have little problem in filling needs from year to year at all levels. At least the current needs for the moment. The positions become open, and supply of professionals always exceeds demand. When they huddle among themselves, industry leaders worry, however, whether they are attracting the best and brightest in finance, capital markets, financial analysis, and client management. In soaring times in the 1990s and mid-2000s, investment banking could lure those who might otherwise have been at the top of their fields in physics, astronomy, mathematics or law. Are the top banks now surrendering the creme de la creme to the payrolls at McKinsey or Booz Allen or to Kleiner Perkins, Google, Apple, Citadel, or John Deere?

MBA students and recent graduates who genuinely have an interest in banking wonder whether banks are taking the right steps, beyond lavish receptions and fly-backs to New York City, to improve the environment in investment banking? Are they focusing properly on the development of younger bankers and providing an environment to promote longer career stints? Have banks gone beyond the familiar mindset of hiring associates in large, flowing numbers when there is increased deal flow, only to dismiss them in waves when there is a hint of a downturn, with hardly a care about what they can do to help associates learn, improve, dissect markets, manage clients and prepare for a career of 10-plus years?

Many students and recent graduates don't necessarily think so. And that might be reflected in the recent trends.

What are other factors discouraging them from chasing after investment banking with the same passion and enthusiasm MBAs did only a few years ago?

1.   Uncertainty and risks in choosing this career path. This has been discussed and hashed out often. MBAs who must invest tens of thousands in graduate education, beyond the opportunity costs from leaving current positions, are not sure they want to take the risk in going into banking roles, only to be dismissed less than two years later when a downturn of any kind threatens.

2.  Work environment and work culture.  The stories of the lifestyle of an investment or corporate banker are legendary--80-100-hour work weeks, little flexibility in schedules and weekends, and indifference to the contributions analysts and associates make.  The industry always promises to improve the culture and make it more humane.  The gestures in the short term are applauded; however, there is a long-term reluctance to change the environment. The pressure to generate revenues from an uncertain flow of deals supersedes the importance of tending to the day-to-day environment of associates.

3.  A LIFO approach to managing personnel numbers.  An ugly tradition of investment banking is to  beef up hiring when the going is good and to reduce staff in droves when there lies a looming threat to deal flow or incentive compensation.  Notwithstanding the performance and potential of analysts and associates, senior managers tend to take a LIFO approach--"last in, first out"--when orders from upstairs require staff reduction. MBAs are astute enough to know this practice might continue and wise enough to decide they may not want to be subject to it.

4.  The relentless banter about re-engineering and restructuring in the industry. Since the financial crisis and in the midst of Dodd-Frank and Basel III reform, investment and corporate banking is evolving. Some contend a major overhaul is under way or about to happen.  For new MBAs, there is continuing specter that drastic structural change is under way in how deals are done, how groups are formed, how clients are managed and how people are paid. MBAs may not be sure they want to launch careers when the industry is in the midst of soul-searching.

The numbers reflect souring sentiments. However, rest assured, at top schools there continues to be a core of students and graduates interested in corporate finance for finance's sake, not for the sake of what the industry always awarded--prestige, travel, headlines from deals, and lucrative bonuses. These are the MBA students and graduates who pursue banking because of the lure of the deal, the appeal of market activity, and the thrill of finding and delivering financial solutions to Fortune 500 companies.

They are the ones who withstand the ills of the environment and culture and see investment banking as a process of building crucial finance skills and experiences for the long, long career haul. They endure both the good and bad, appreciating newfound knowledge and understanding of markets. The declining trend is not yet alarming to banks, because supply is still steps ahead of demand and because hard-core finance graduates seem to always navigate their ways toward banking.

Tracy Williams

See also:

CFN--Investment banking vs. private banking, 2009
CFN--Is investment banking still hot?  2011
CFN--What about corporate banking? 2010
CFN--Who's heading into finance?  2012