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Investment Banking Analyst Path
The typical investment banking analyst career is two years.
At most North American investment banks, analysts are traditionally hired with the intention of employing them for two years.
High-quality junior talent in finance is in high demand, as many of these analysts will be poached for private equity or hedge fund recruiting within a year of them graduating from school. Investment banks would love to retain their analysts for as long as possible and groom them within the firm, but it’s often not possible as the top analysts generally leave as soon as they can.
When I graduated from university in 2015, my perception was that the 2/2/2 (2 years of IB, 2 of PE, then 2 of business school) was the only solid path.
However, I encountered many successful 3rd-year investment banking analysts who took that additional year to gain better career focus, build their network, or take their GMAT. For many people, being patient and taking the time to accrue more experience is the right decision.
Given how accelerated recruiting is (which in the past, has kicked off within 3-6 months of graduation), many people now opt to do an additional year in banking.
Let’s go over the mechanics as well as the pros and cons of this decision.
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Why Does the 3rd Year Analyst Position Exist?
Investment banks want to keep their analysts, but associates often cost 1.5 to 2x as much as analysts. So, many firms require their analysts to do a third year as an analyst before a potential promotion to the associate level. This gives banks access to cheaper labor and also gives employees get more experience before becoming an associate.
As seen in the above image, associate salaries are often quite high. This can incentivize banks to keep their analysts for a third year and reduce salary costs.
Some firms like Goldman Sachs and Morgan Stanley will do accelerated promotions directly after 2 years in order to compete with buyside offers, but most other firms will make you do a 3rd year if you want to go directly from Analyst to Associate.
On the other hand, firms like Centerview require a 3rd year and will get testy if you try to leave before your 3rd year. This is part of the deal when you sign with Centerview.
The 3rd year analyst position partially exists because the ramp-up for an analyst is honestly pretty time-consuming.
Most new grads don’t know anything about modeling and it takes them 6 months to a year to not be a net negative to the team. However, analysts often try to check out as fast as possible in their second year. This generally means that most analysts are only very productive for a year or so. Investment banks in turn are generally happy to keep analysts around for another year, as they’ve already invested lots of time into them.
A lot of 3rd-year analysts also end up being laterals from other groups or firms. Many people will start in “less good” groups and then lateral into a “good” group or firm in their 2nd or 3rd year.
I think this is the most common reason why a high-quality analyst will still be around in their 3rd year. You have a lot of non-targets or people who were late to the finance game who need a few years to get caught up to speed.
Benefits of Doing a 3rd Year
Recruiting for the buyside before you're ready can be a disaster
If you didn’t go to an investment banking factory like Penn, NYU or… Brigham Young, then you might not have had great exposure to buyside recruiting until you hit the desk. You might not even have known about the private equity recruiting process until you started talking to other full-time analysts.
For these people, a third-year can be an extremely wise choice. Talking to headhunters expecting to get genuinely helpful advice can be extremely dangerous. Interviewing with firms before you’ve done ample technical preparation will lead to disaster.
In my experience, firms are not very forgiving to people who already interviewed with them before. There is enough talent that many firms won’t be incentivized to give you another chance. Therefore, it’s often better to not talk to headhunters or firms at all in your first year if you’re not ready.
The advantage of waiting another year to recruit can be immense. You’ll get more deals. You’ll likely get better deals too because you’ll have the trust of your team. You’ll have more impassioned and honest recommendations. You’ll feel more comfortable in the interview room and in your environment.
Waiting an additional year can give you a clearer picture of what to recruit for
Many people waltz into recruiting heavily pressured by their peers. Lots of people default to doing private equity because it’s the fashionable thing to do and it seems like everyone else wants to do it. I am a victim of this kind of thinking and I do think it is a very safe option. But private equity is certainly not for everyone and it’s nearly impossible for someone with only 3-6 months of work experience to know whether private equity is right or not for them.
Doing another year can give you more experience and networking opportunities to actually meaningfully meet with firms. You’ll get a slightly better picture of what the different firms are like. You’ll probably know more people at each of the firms as well.
Your 3rd year is going to be slightly more chill
This isn’t true at every firm, but 3rd-year analysts are often viewed as “Managing Analysts”. You get paired a lot with 1st years and you’ll be competent enough to handle a lot of the work more efficiently. You should have enough clout that you only have to work on relatively important deals.
Your salary is slightly higher
This is a modest benefit, but your salary will increase a bit more from your 2nd to 3rd year. I would estimate it to increase by maybe $10k-$15k from the 2nd year position.
Cons of Doing a 3rd Year
You have to do another year of investment banking
Being an investment banking analyst is not easy. It might seem like an OK proposition when you’re a 2nd year, but doing an additional year can be a pretty unpleasant position to be in. Most of your friends will have left the firm. You’ll feel like the kid who had to repeat their last year of high school.
Most 3rd years I know developed a special, truly broken brand of jadedness and cynicism.
And a year in finance is also a pretty long time for career development. Lots of the top people in finance will hop around several times in order to angle for promotions, and doing a 3rd year deprives you of that fast track.
Most top analysts I know did not do a 3rd year
I obviously still know a ton of extremely bright and capable 3rd years, but the most intense and “hardo” finance people still all got out of banking as soon as they could. The people at the top buyside jobs and the people who have gobbled up the most promotions both left banking early on.
I also think buyside firms have a slight impression that the top talent is all going to be gone before they hit their 3rd year. It’s a bit like how the top NBA recruits won’t do all 4 years in college, they’ll leave after just 1 year in the NCAA. The very top talent doesn’t need the extra year to prepare themselves for the real world.
That won’t prevent firms from hiring people who do a 3rd year, but it will likely mean that firms have a higher level of scrutiny.
Recruiting Insights for a 3rd Year Analyst
I would generally recommend people to only do a 3rd year if you really think you need the extra time to prepare for recruiting or if you started in a sub-optimal role.
If you started in a bad group or firm, a 3rd year is likely going to be your best bet for recruiting. The top bulge brackets and elite boutiques have a definitive advantage over their peers for private equity recruiting.
Here are some other recruiting insights that might be helpful:
You might be surprised, but a fair amount of reneging and visa problems occur at the buyside level. Some people continue to recruit for other firms or change their minds and end up rescinding their offer. As a result, many private equity firms still hire for immediate starts. 3rd-year analysts are prime candidates for these roles as they’ll have more experience.
I generally think that if you have lateraled firms in your first year, you should probably wait to recruit. It’s odd and difficult to recruit for buyside firms if you’ve only been in your investment banking group for a few months. You should ideally at least have one deal or one serious project before recruiting with that firm.
For example, if you started at a regional boutique and end up lateraling to a top firm like Goldman or PJT part way through your first year, you might still get contacted by headhunters in the first round of recruiting. However, I would personally advise people to wait until their next year to fully recruit.
I know a few examples of people who immediately lateraled and then recruited, but it’s a riskier proposition. Still entirely viable, but it’s a very “bet on yourself” move that doesn’t work for everyone.
Some smaller elite firms (like small hedge funds and venture capital firms) don’t hire every single year. If you’re trying to go to a specific firm, there is some merit to doing a 3rd year and waiting for a spot to open up. I wouldn’t actively recommend this, but I know some 3rd years who landed great hedge fund spots because they were patient and those hedge funds don’t hire every year.