The Big Talent Drain in Finance

As I continue my job hunt, I've noticed a significant influx of high-performing individuals transitioning from high finance into executive positions at early-stage technology companies. This migration is particularly pronounced among investment bankers taking on roles such as tech CFOs.

Media outlets are also filled with reports detailing shortages of talent within investment banking and private equity, prompting me to share my perspective on the underlying causes fueling this exodus and its implications.

What’s causing the talent drain?

Undoubtedly, the catalyst for this paradigm shift can be traced back to the seismic impact of COVID-19. The pandemic forced many to reassess their priorities, prompting existential reflections on the pursuit of relentless career advancement amidst life's inherent fragility. The ascendancy of social media platforms such as TikTok has provided unprecedented glimpses into the day-to-day realities of various professions, including high finance. COVID-mandated remote work exacerbated the strains of an already demanding profession, disillusioning aspiring entrants who are repelled by the chaotic and often toxic culture endemic to high finance.

With rising interest rates impacting the forward IRR of private equity and the perennial cyclicality of investment banking, the appeal of these career paths is diminishing. Firms are compelled to augment compensation packages to remain competitive, yet the allure of lucrative remuneration is increasingly overshadowed by the desire for a balanced lifestyle.

Furthermore, many are leaving the industry to pursue unconventional paths, including becoming a social media creator. As a creator, I can tell you it can be a wonderful lifestyle business if executed properly. I've known at least two seasoned long-only investors who have gone full-time as creators.

In contrast, the technology sector presents a compelling narrative of growth and purpose. Characterized by secular trends and an ethos of value creation, technology offers not only comparable financial rewards but also the opportunity for equity participation, enabling juniors to share in the wealth they help generate. The tech industry also boasts a more hospitable work environment, with attractive office perks and a less cutthroat culture.

Technology is hailed as an enabler of productivity and tangible value creation, a sentiment shared by many disillusioned finance professionals yearning for a more meaningful contribution to society. Indeed, the capacity for tech professionals to manifest their ideas into tangible products underscores the profound allure of this burgeoning industry.

What are the implications?

The allure of finance, once a magnet for top-tier talent, has significantly diminished in recent years. Anecdotes abound regarding the decline in quality among investment banking analysts, while senior bankers and equity research analysts are departing for executive roles at burgeoning startups. These ventures often promise not only competitive base compensation but also lucrative stock option arrangements and more manageable work hours, offering a compelling alternative to the grueling demands of traditional finance roles.

Equity research is no exception. As deflating compensation, long hours, and limited exit opportunities dissuade top talents, I have observed an increasing number of candidates from non-target schools working in the industry. I am an evangelist of helping non-targets get into finance, but those who achieve that goal are likely to be the cream of the crop at non-target schools.

It's likely statistically significant that an average non-target school candidate is less competent and more delusional than an average target school candidate. Therefore, the talent quality on average has gone down.

In a service-oriented business like finance, human capital is paramount, and a talent drain weakens the industry's ability to deliver value to clients. This erosion of product quality sets off a vicious cycle wherein diminished offerings translate to reduced profitability and budget to compensate talents, further driving talented individuals to seek opportunities elsewhere. As such, the finance industry can lose its place as one of the most desired career paths.

The ramifications of the talent exodus also cast a shadow over MBA programs. Traditionally, MBA graduates have been a mainstay of investment banking and management consulting, yet the shifting tides of students’ preferences towards the tech industry pose a significant challenge to the value proposition of these programs.

With tech companies renowned for their receptiveness to candidates from non-traditional backgrounds without structured academic training, the allure of an MBA is increasingly called into question, compelling business schools to reassess their curriculum and recruitment strategies to remain relevant in a rapidly evolving landscape. As MBA programs grapple with dwindling applicant pools, business school deans are compelled to innovate and adapt, lest they risk obsolescence in an era defined by shifting industry preferences.

Without a deteriorating pipeline of junior talent, investment banks, private equity firms, and hedge funds also have to deal with the worry of where they will locate the next generations of leaders. What will happen in the decades to come? Will as many young talents idolize the likes of Ken Moelis, Stephen Schwarzman, and Ken Griffin, or will most of them solely be bowing to the altars of Sam Altman, Elon Musk, and Jeff Bezos?

A contrarian conclusion

Taking a contrarian view, I think it’s easier than ever to break into finance. Unlike in the 90s when students suffered depression for failing to break into Lehman Brothers or DLJ, if you attend Harvard Business School and are recruiting for investment banking, your peers will feel sorry for you. I remember a Stanford GSB peer in my MBA intern class at a major investment bank; everyone else asked him "why" when he said he was interning in investment banking. And likely, at least half of his GSB classmates are either going into VC or starting a business. Just shows how times have changed.

Over the last 3 years, I have noticed many successful sell-side research senior analysts leaving the industry to become CFOs, venture capitalists, or the Head of Investor Relations. Why are they throwing in the towel? Hours will be better and money is not there anymore, especially considering stock options. This presents the opportunity for rising stars to absorb the II votes vacated by these legendary analysts, opening up a path to build their brand.

If you are still very passionate about working in high finance, this is a great time to be contrarian. Just know the money is not as lucrative as before, the grind is still very much there, but it's still one of the few career paths where juniors have earlier financial linkage to their contribution than peers in other industries.

Finally, let's not forget, making it rain in technology is not any easier because competition has become fiercer due to the best flocking to where the money is flowing into. Just like the stock market, the labor market is efficient most of the time.

Thanks for reading. I will talk to you next time.