I started working in finance in 2002, joining an investment banking graduate programme. With a mere bachelor's degree I was streamed into the ‘analyst’ class. Sitting alongside me were several trainees with PhDs in mathematics; one already had several published papers in option pricing. The more prestigious ‘associate’ class was reserved for the true elite: recent MBA graduates.
That was a long time ago: this year's cohort of banking analysts were still in pre-school when I joined banking. Whilst they have been growing up the usefulness of MBAs in banking has withered away.
To see why, let’s consider the reasons why MBAs were once so important: relevant content, signalling, filtering, and networking.
Why was the content of MBA courses relevant to banks in the past?
You might assume that prospective bankers take MBAs because they teach you how to be a banker. Indeed at one time that was pretty close to the truth. In the distant past, the most important activity in banking was M&A: mergers and acquisitions, including initial public offerings (IPOs). Good M&A rainmakers needed (and still need) the sort of generic business knowledge that is the bread and butter of MBA courses.
Two decades ago, not all MBA students went into M&A. Some went into equity research, where their main job was to promote the M&A business. In equity research, the main quantitative skill required was the ability to value companies using discounted cash flow analysis (DCF). More mathematically inclined MBA students could pick up a modicum of knowledge about financial engineering; easily enough to impress the average corporate treasurer.
However, when I went into banking in the aftermath of the tech bubble, the importance of M&A and IPOs to banks' revenues was already in a secular decline. That trend has continued since. Yes, M&A businesses had an excellent fourth quarter of 2018 but today, more companies can raise money whilst staying private, and many of those that are public prefer to use their cash for buy backs. Meanwhile MIFID II is the latest of many nails in the coffin of equity analysts.
The real problem, though, is that banks and hedge funds don’t need business generalists anymore. The elite of this year's graduate class will be students who can code and who understand machine learning. Traders increasingly have masters or PhDs in highly quantitative subjects; simply understanding how to do a DCF is no longer enough.
Why did bankers want to study top MBAs?
With the exception of accountancy and law most degrees have little relevance to the jobs students end up doing. So why bother doing them? It’s because they act as signals to employers that an employee is worth hiring.
An MBA signals to a firm that a prospective employee is deeply committed to banking. Doing an MBA is arduous and often dull – just like many jobs in banking. They’re also expensive; both in fees and the opportunity cost of lost income. An employee with an MBA must really want to be a banker.
Banks get hundreds or thousands of CVs for each positions. A busy hiring manager isn’t going to waste hours looking at each one to decide who is worth interviewing. This is where filters come in. A junior HR person can filter out applications that don’t have certain minimum requirements.
Adding ‘MBA essential’ to a job was therefore once an easy way for lazy firms to reduce the number of CVs they reviewed in detail. This outsources the job of finding good candidates to university admissions staff. Just getting accepted for a prestigious MBA is difficult, so if you’ve managed it your CV is probably worth considering.
Employers still use filters, though most are now automated. At the same time, the net is cast wider. Masters in Finance, Financial Engineering, or Econometrics qualifications from top schools are as prestigious as many MBAs. Completing them is tough – in terms of quantitative skills much tougher than the average MBA – making them an excellent signal. They are also more relevant to the bankers of today.
Is it worth doing an MBA for the networking opportunities?
Perhaps the biggest advantage of an MBA was the networking opportunity it provided. If you were going into M&A or sales trading then a rolodex full of future CEO and CFOs would be extremely useful.
Personal contacts are still useful in getting through the door, but they won’t close the deal. Forget ‘relationship banking’: strict regulation and fee pressure mean that a corporate or buy side firm has to come up with a very good reason not to pick the best deal.
Is this the end of the MBA?
MBAs will be a smaller part of financial recruitment in the future, but they shouldn’t disappear entirely. Many MBA schools are updating their courses, by including modules on coding and machine learning, whilst still keeping the generalist nature of the qualification intact.
Importantly firms without diversity of backgrounds and opinions are no fun to work in, and the resulting ‘group-think’ can have serious consequences. Too many MBAs who all think the same is bad, but hiring a team composed entirely of Phds in physics would be equally damaging. Indeed I would argue that group-think amongst banking Phds partially caused the 2008 financial crisis!
Robert Carver has worked on the sell side - as a trader of exotic options - and on the buy side: he is a former head of fixed income at quantitative hedge fund AHL. He has a BA and Msc - no MBA, which probably makes him biased. Robert is the author of 'Systematic Trading' and 'Smart Portfolios'817.
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