Today, we're talking about Wall Street bonuses
and what they tell us about what's
gone on in the financial services industry this year.
OK, why might we want to look at bonuses?
Well, for a financial services firm,
really, compensation is going to be one of the highest
costs to the firm.
And if you're trying to cut costs,
the first place you might do it...
probably going to be a bonus.
For banks that's a little bit different
because they also have this interest rate cost.
But largely, compensation is going to be the biggest.
You might also have some technology costs, maybe
some rent that you have to pay for your office, probably
a little bit of advertising and marketing,
but really, compensation is going
to be the core cost to your business.
So let's go through each of these four industries
and talk about what's gone on this year.
Let's start with the top line, which refers to private equity.
As you could see, private equity.
Probably a pretty healthy bump up in bonus this year.
Why is that?
Private equity has become a really, really popular asset
class for investors to put their money into.
Private equity takes firms off the public market,
or they invest in private firms.
These are not going to be firms that are listed on the S&P 500.
Money has been flowing into this asset class.
And if you're not changing your headcount very much,
then you're probably going to have your revenue go up,
which indicates a healthy bonus for your employees.
Let's go to this next line, which is hedge funds.
Now, hedge funds solidly in positive territory
for their 2019 bonuses.
But this is actually surprising, because most hedge funds
have not really performed the way
that we think that they might given the fact that they
have a positive bonus.
A vast majority of hedge funds don't over perform.
A small number do.
But investors still need to diversify their portfolio,
and hedge funds often offer that diversification that they need.
And so that's why, despite the fact that hedge funds haven't
had great performance this year, they're
still in positive territory for their bonuses.
Now, the next red line is asset management firms.
Asset management firms deal more in public markets.
And as you'll see we are still above 0
here for positive change in bonuses this year.
And yeah, that's partly due to the markets doing well.
But it's not really as high as it would be if this was only
correlated to markets.
What's happening in asset management
is this thing called fee pressure.
There's passive investing, which is a very low-fee investment,
has been driving down fees in active management.
So that's why, despite healthy markets this year,
asset management firms not having as good of a year as you
would think.
Now, the last line is banks.
So keep in mind that this includes both investment banks
as well as commercial banks which, between the two,
there's a lot of variation in those two groups of banks.
But going back to 2016 you can see,
oh, things weren't doing so great.
2018.
Bounce back year.
We bounced back into positive territory
for bonuses for banks.
But this year projected to be a down year once again.
One of the big things that's driving this
is low interest rates.
Interest rates are how banks make money.
And when interest rates are low, their margins
are squeezed, thus causing them to need
to pull back on the compensation a bit
in order to keep their revenue healthy.
So when it comes to the big Wall Street bonus,
just remember, it's not always going
to be up just because the markets are.