Thinking Like A Business Owner: Skill and Experience in Finance

Thinking Like A Business Owner: Skill and Experience in Finance

Neil Winward 07/01/2018 10

Star Wars: Episode IV – A New Hope is the retitled name of the second highest grossing film in the history of movies – the first being E.T. Luke Skywalker was the new hope in the struggle of the Rebel Alliance against the Galactic Empire. The movie was written for the screen by George Lucas as a collection of the science fiction he read and imagined as a twelve-year-old.

Living in America in 2018, it is easy to cast the Democrats in the role of the Rebel Alliance and Darth Trump as leading the dark forces. The identity of Luke Skywalker is not yet clear. The need is obvious – and urgent. The political and cultural mess that dominates the headlines in the United States prompts the question “where did we go wrong?”

A New Model Needed?

It is a good question to ask at the beginning of a new year. The answer is no doubt complex and is beyond the scope of this article. The remedy, the Luke Skywalker of the 21st Century, may have been educated at TM Landry (since the school only started in 2005 and its graduates are currently in college, this may be a longer-term fix).

The TM Landry school in Breaux Bridge, Louisiana was founded by Michael and Tracy in 2005. Their initial class was “five black troublemakers.” The school is private and claims to be targeted at out-of-the-box thinkers. It has a 100% graduation rate and 100% college acceptance rate. Its graduates are attending all the Ivy League schools. Its demographic is not wealthy and yet, with $525 monthly tuition – a challenge for some parents – there are 150 prospective students on the waiting list. The only sport played is chess and many students are there until 9pm. They get five days summer vacation. All the students gather around the computer to open college acceptance communications.

Landry’s model is very business and economics focused and its goal is to have its graduates become business owners. Its education is focused on building life-skills rather than teaching the ability to pass tests and boost GPA. It is, in other words, what many people feel education ought to be. Many leaders – the current US president is only the most egregious example – find their ways to positions of power and responsibility without apparently having built the life skills to be worthy of the power they hold.

Skills Deficits in Financial Services

The skills deficit has many manifestations (#metoo has highlighted a few) but one specifically became apparent to a generation of professionals whose careers in financial services started in the early to mid-eighties. The deficit relates to the need that should be paramount for everyone – not just TM Landry students: the need to think out-of-the-box, or, put in a business context, the need to inventory, hone, acquire, market and apply skills in a process of continuous reinvention and lifelong learning.

The financial crisis in 2008 shredded many careers. Some of the jobs lost were in areas where the business had died; some were people who had not added value for a long time; some were people too senior who lost political battles.

Jobs lost in 2008 and 2009 because of the financial crisis totalled approximately 8.7m. It took until 2014 to recover that number of jobs. Examples of financial businesses that died or are in the process of dying are: sell-side equity research in second-tier investment banks (killed by MiFID’s insistence of doing away with soft-dollar compensation); open outcry trading – the floors of exchanges are not the places they used to be anywhere but the United States; proprietary trading among banks (killed by regulatory constraints on required capital).

The Talent Pool Wasted

The result of all the attrition is a pool of very talented, experienced professionals, most of whom have had a tough time finding a place in the financial ecostructure.

Compensation in financial services has been above average for a long time. In investment banking, the ‘bonus’ culture has raised expectations over decades. There is a perception of riches beyond reason that lifts the aspirations of even those unlikely ever to reach an unreasonable level of pay.

Revenues in banking are extremely volatile. The billions of dollars of deferred tax write-downs of deferred tax assets by Citigroup, Bank of America and AIG because of Tax Reform are evidence of this. What these institutions have in common is leverage. Low-cost debt can boost equity returns nicely when all goes well, but the loss of principal in the bank lending business is rarely compensated for by the spread on the loan.

As banking becomes more technology-facilitated, there is a perception that algorithms are replacing experience and that high-cost employees in their forties are becoming dispensable. It may be a mistake, but the jobs are disappearing.

Solutions?

How then are these highly qualified professionals to find a purpose in today’s economy? Some left the business with sufficient capital to downsize their lifestyle and live comfortably on the returns from their portfolio, perhaps with a little consulting thrown in. Some started businesses with varying degrees of success. Some left with a sufficient level of severance and client relationships that they were able to start advisory businesses and recruit former colleagues in building very successful businesses.

Many have struggled and continue to struggle. The process of reinvention involves a harsh assessment of skills and a massive campaign of network building and utilization. This process is adequately but not often well served by the professional headhunting and outplacement community. Headhunters are mostly looking for employed professionals – a current job being the primary indication of market value.

Platforms such as Ziprecruiter and the many affiliated platforms that feed into it offer employers a wonderful tool for efficient selection. Of course, they rely on algorithms to trawl through resumes – distant cousins of the same algorithms that triggered the job casualties in the first place.

LinkedIn is a powerful tool for all involved to broadcast their evolving brand and provide material for recruiters to find candidates. The job seekers – often balancing looking for a job with pursuing their own entrepreneurial mission – quickly learn that these algorithms are no friendlier in finding a job than they were in removing them from their job. There is no easy fix here.

Skills in Demand

Skills in demand in financial services broadly revolve around raising capital and investing it for a target return; managing relationships with clients who want to do deals; technical competence in specific areas, whether derivatives, tax or even cryptocurrencies; the ability to originate and close transactions; and an understanding of how and why people do deals with each other both within and between organisations.

Many of the above skills can be equally deployed, though not equally rewarded, inside an organisation as an employee and outside as an advisor. Getting hired as a small firm is tough. The firm brand must be compelling in the specific area with deal experience on all fours with the assignment the client has in mind; the alternative is to have a better mousetrap that is in demand and a target client that very much wants it.

Neither of these is common. Most small firms must cultivate and build the relationships that give preferred entrance to assignments. The assignment itself is the best recommendation for future business. Because client’s needs vary and because they are not doing deals continuously, many clients are needed: diversification.

The challenge for a small firm, even assuming assignments are won, is scale and leverage. Advisory businesses are personal in nature and clients crave the attention of the deal leader – delegation is not easy. Compensation expectations need to align very closely with value offered. Market benchmarks for various compensation models – percentage of capital raised; retainers for advisory work; M&A fees – drive pay rather than year-long deal activity capped by an entitlement-based fight for a share of a bonus pool.

What is the Answer?

Aggressive brand-building across many platforms, including but not limited to LinkedIn. Thoughtful targeting of prospective client needs and creative pitching of relevant ideas. Persistence in contacting, following up. Dogged attention to delivering quality services when the door is opened. An ability to assemble necessary expertise from existing relationships and those dependent on deal origination to provide their services. Pricing early assignments attractively to win deal track records, paired with a willingness to walk away from prospective clients who have no interest in paying and every interest in exploiting free advice.

Everyone, inside and outside an organisation should learn to think like a business owner. The students from TM Landry have a head start. What they lack is the experience. Properly defining, marketing and monetising that experience is the hope for the over-fifty crowd who are being turfed from financial services.

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  • Nirvik Mahin

    I strongly believe that professionals who are strong in IT are in hot demand in the financial sector.

  • Shaju Miah

    Clients are looking for all rounders with breadth of experience, someone who can do a lot more. Organisations are looking for candidates to be more hands on as well.

  • Adrien Dorsey

    The line between finance and technology is becoming more blurred with the rise of automation

  • Kirill Kondrachov

    In reply to: Adrien Dorsey

    Automation and technological advances will eliminate some jobs but also create new ones.

  • Lee Yung Shun

    Well not all employers deliver on what they promise, people prioritise companies that offer health and wellness programs, or the flexibility to start and leave early. The hectic schedule of an IB analyst isn't appealing to the younger generation.

  • John Lauren

    A lot of good information, enjoyed reading your article

  • Kirill Kondrachov

    It's always good to read your opinions Neil

  • Joe D

    The finance sector has evolved rapidly over the past few years. Don't worry about money, money follow the people, people follow the dreams. If you have a dream, just go ahead.

  • Ali Yanda

    excellent stuff, thanks for sharing your opinion with us

  • Maria Eduarda

    I would love to buy "Fire and Fury", apparently President Trump is facing questions about his mental state

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Neil Winward

Taxation Guru

Neil is the CEO of Sevara Capital Advisors. He is passionate about solving tax, accounting and regulatory problems for institutions that have invested billions of dollars of capital in multiple jurisdictions. His company provides solutions for banks, insurance companies and hedge funds to tackle their problems related to tax returns, financial statements, accounting and internal finance matters. Neil holds a master’s degree in Law from the University of Cambridge. 

   

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