Hopefuls to the finance world are often bewildered by the size and diversity of the industry. Stocks get all the press, but equity markets are both much smaller than the credit markets and less important in the world of finance. After all, study after study has proven that active management does not beat passive investing in large-cap U.S. equities—and this fact is reprinted often enough in the mainstream press that it’d be hard not to have heard of this fact.
Of course, there are many facts behind this that go underreported, such as that studies have shown active management outperforms in other markets, like in preferred and unrated corporate bonds. And outperforming the index is just one metric that matters; for some money managers, limiting volatility is more important, or lowering your risk (i.e., a portfolio beta) as much as possible. For others it’s just about finding uncorrelated returns.
And that’s just in the asset management world. When we go to wealth management, corporate finance, consulting, investment banking, audit and advisory…as you can see, the tent is huge.
So huge, in fact, that firms tend to organize themselves on the three office principle. This applies to everything from your local community bank to the largest hedge funds in the world. In fact, the same terminology is used in other industries and doesn’t originate in finance itself; anyone who’s worked in a restaurant knows the front staff and back staff are very different! The same idea applies in finance, too.
The front office gets all the attention and, in many cases, all of the money. These are the sales/traders who build and maintain relationships, the analysts who accompany those sales/traders, and the managers who meet with potential investors, partners, and vendors to improve the operation of the firm and find new opportunities. Mostly “client facing”, the front office’s value depends heavily on their ability to communicate, promise, and deliver.
The back office is pretty much the opposite. There’s less money in the back office, but less responsibility, typically fewer work hours, and pretty much always less stress. Most crucially, there is much greater job security, and the opportunity to stay in the back office for 50 years while collecting a pension, enjoying vacation days and getting consistent pay raises is there, which is not easily said for other industries in our current era.
The middle office is a supporting role like the back office, but their roles tend to be a bit more complex and proactive than the back office. Risk management and compliance are some of the most important functions of the middle office. For example, lawyers in the middle office might help the front office build and design a new product for clients without actually spending time with the clients to convince them of its value; the lawyers are there to help the front office make the best product they can while staying within the limits of the law, while perhaps also helping smooth out details that could create problems in the future. A back office lawyer, however, would be more likely to provide reviews of legal documents after a deal has been made, reacting to the middle office and front office’s work after it’s done rather than contributing to it.
Middle office roles tend to have more job security than front office, although their proximity to the front office (and higher pay, as their exposure to the front office typically means some kind of bonus pool tied to the success of the dealmaking pipeline) means there’s less security than the back office. However, anyone who enjoys working with data but also wants some room for creativity and input should take a middle office role rather than a back office one, and anyone who isn’t willing to work very long hours interacting with clients to win deals will also find the middle office a better fit than the front office.
Whatever part of the financial world you think best fits you, just don’t forget that the world is likely much bigger than you realize and the perfect fit might be in a corner you’ve never heard of before. And wherever that corner is, it’ll inevitably be in one of these three categories.