Work at Financial Institutions

Suppose the market's risk-free return rate is 3%, and you've got a strategy that delivers a risk-free 10% return. (Any risky return can ultimately be converted into a risk-free equivalent—if your risky return is 30%, multiplied by probability, the expected value might only come out to 8%, which is less than 10%). How would you monetize it? Would you set up a fund, offer it to the public, give your clients 9%, and keep 1% as a management fee? Is that what you'd do?

Absolutely not. If there truly is a risk-free 10% return, you'd never sell it to the public. Instead, you'd borrow at 3% and invest at 10%, netting a 7% spread—seven times more than what you'd earn from commissions.

So when would you go public with it? There's only one answer: when your model's risk-free equivalent return falls below 4%. If it's under 4%, borrowing at 3% to invest earns you less than the 1% commission would. The smartest move is to package it as a product and sell it externally, guaranteeing you at least that 1% commission no matter what.

To sell this sub-4% risk-free-yield product to as many clients as possible, what do you need?

Packaging.

You need to repackage a model with less than a 4% risk-free return into a product that appears to offer a risky 30% return—that's what makes it attractive. Clients can't calculate risk; you can. That's your technical edge. In the financial industry, this capability is called the middle and back office.

And the people who go out and sell to as many large clients as possible? They're called the front office.

If you're a top-tier academic with or without family connections, you can still work in finance—but in the middle/back office. What are you selling? Your intellect. Your edge is wrapping a product whose actual risk-free return is under 4% into something that looks incredibly attractive, making clients overlook the risk and perceive a potential 30% return. That's your selling point. You're selling smarts.

If you're not cut out for that and still insist on entering a financial institution, your only option is the front office. What is the front office? Sales. Quota-driven. You earn commissions based on how much you actually sell.

Sales comes in many forms—selling refrigerators is also sales. But what kind of sales is it? Volume-based sales. Zhang San makes 10 million a year; Li Si makes 100,000. Would you sell Li Si one refrigerator and expect to sell Zhang San a hundred? No. You'd be lucky to sell Zhang San a few.

Finance works differently. If Li Si buys 100,000 worth of your financial product, Zhang San might genuinely buy a thousand times that—10 million worth. Financial product sales are truly linear. This means financial sales essentially revolves around chasing large clients, because that's where efficiency lives. When your client base is this concentrated, it's hard to ensure salespeople don't cross ethical lines during competition. If you don't do it, someone else will. Unfair competition is inevitable because the person who engages in it will dramatically boost sales efficiency and performance.

When a group of people are engaged in unfair competition, how do they ensure they won't betray each other? What form would mutual trust take?

The most sophisticated human relationships often manifest in the most primal ways. That's why the financial circle has so much drama.