Latest / The Demographics Podcast with Fexingo: Aging Populations, Birth Rates, and Economic Impact / How Falling Birth Rates Reshape the Investment Banking Industry
Transcript
- Lucas: Luna, let me start with a number that stopped me this week: Goldman Sachs brought in its smallest incoming analyst class this summer since at least 2015 — roughly 12 percent smaller than last year's cohort. And it's not just a budget trim. It's the leading edge of a demographic wave. Luna: Wait — so the talent pipeline for Wall Street is already shrinking? I thought these firms had their pick of Ivy League graduates. Lucas: They still do at the very top, but the absolute number of 22-year-olds in the U.S. has been flat for years and is about to decline. The pool of bachelor's degree graduates peaked in 2024 and will drop by roughly 3 percent by 2030, according to the Western Interstate Commission for Higher Education. Fewer bodies, same number of banks trying to hire them. Luna: So firms like Goldman, Morgan Stanley, JPMorgan — they're fighting over a shrinking pie. What are they actually doing about it? Lucas: A few things. First, they're pulling the timeline earlier. Second-year analysts are getting accelerated promotion timelines — think 18 months instead of 24 — just to keep them from jumping to private equity. Second, they're casting a wider net — recruiting from non-target schools, liberal arts colleges, even community college transfers who complete a finance certificate. Luna: I read that Evercore launched a 'career returner' program for people who left finance for family reasons — mostly women, but also men. That feels like a demographic adaptation. Lucas: Exactly. That program started last year and has already placed about 40 people. And you see similar moves across the Street. The math is simple: if the supply of 22-year-olds isn't growing, you either automate the work, retain who you have longer, or pull from pools you ignored before. Luna: And automation — that's the third lever. I've seen estimates that AI can handle 30 to 40 percent of the grunt work in M&A advisory — comps, precedent transactions, even initial draft of the pitch book. Lucas: That's right. JPMorgan has an internal tool called 'LOXM' that's been automating equity trades for years, but now they're rolling out generative AI tools for due diligence document review. One managing director told me it cut the time to review a purchase agreement from 40 hours to about 8. That changes how many junior bankers you need on a deal. Luna: But here's the tension I see: if you reduce the grunt work, you also reduce the training ground. Analysts learn by doing those 40-hour document reviews. They learn the patterns. If a machine does it, how do they develop judgment? Lucas: That's the million-dollar question. Banks are experimenting with 'rotational apprenticeship' models — shorter, more varied deal exposure so juniors see a broader set of situations, even if they touch fewer documents directly. But no one has cracked it yet. I think the partnership model itself might have to evolve. Luna: Meaning what — fewer partners? Or a different career path? Lucas: Both. Historically, you grinded for a decade, made managing director, maybe partner. But if the junior pool shrinks and the work changes, the 'grind' doesn't look the same. Some firms are creating 'senior advisor' tracks that aren't partnership track but pay well — essentially a staff-level expert who stays for 20 years instead of burning out at 28. Luna: That sounds more like a law firm model. Law firms have had non-equity partners for decades. Banks always resisted it because the culture was about 'eat what you kill'. Lucas: Right, but the demographics are forcing the cultural shift. And there's another factor: private equity is competing even harder for the same talent. PE firms are bigger than ever — the top 10 firms manage over a trillion dollars combined. They can pay a 28-year-old vice president a million dollars a year. Banks can't match that on salary, so they're offering faster promotion, better work-life balance — or at least better than the 100-hour weeks of the past. Luna: I saw a survey from the Wall Street Oasis forum — super unscientific, but telling — that 60 percent of analysts said they would prioritize 'reasonable hours' over a 20 percent bonus bump. That would have been unthinkable a decade ago. Lucas: It's a genuine shift. And it connects back to demographics: if there are fewer young people, they have more bargaining power. They can demand better conditions. Banks are responding with wellness programs, mandatory weekends off during 'quiet periods,' and even sabbaticals for senior bankers. Luna: Speaking of senior bankers — the aging partner class is another demographic time bomb. The average age of a managing director at a bulge bracket firm is now 48. Many are in their late 50s. Who replaces them? Lucas: That's the quiet crisis. There's a 'missing middle' — people in their mid-30s to mid-40s who left banking during the 2008-2012 period and never came back. So you have a bulge of 55-year-old partners and a bulge of 28-year-old analysts, but not enough in between. Some firms are actively hiring back mid-career bankers who left for PE — offering them 'senior vice president' roles with a path to partner in 3 years instead of 7. Luna: Okay, that is a direct adaptation to a demographic hole. But does it work? I talked to a recruiter who said many of those mid-career bankers won't come back because they've gotten used to the lifestyle — or the money — at a PE firm. Lucas: That's true for some. But not all. PE firms are also under pressure — fundraising is harder, returns are compressing. The 'golden age' of PE might be fading. So coming back to a bank with a clearer path to partnership could be attractive for someone who doesn't want to be a road warrior for another decade. Luna: Let's widen the lens a bit. How does this look outside the U.S.? Europe has even lower birth rates. Lucas: Europe is ahead of the curve, and it's painful. In Germany, Deutsche Bank has been outsourcing junior analyst work to India and Poland for years. But the quality gap is real — you can't fully replicate the apprenticeship of being in the Frankfurt or London office. Some smaller European banks are merging just to pool their talent. Luna: And Japan — birth rate 1.2, the lowest among major economies. How does Japanese investment banking survive? Lucas: Japan is an extreme case. Nomura and Daiwa have been automating relentlessly. They use AI for research reports, compliance checks, even some client communication. But they also rely heavily on a 'lifetime employment' model — people stay for decades, so the junior pipeline isn't as critical. The problem is that model works only if you have enough people, and Japan doesn't. So Nomura is actively recruiting from Korea, Taiwan, and Southeast Asia — hiring foreign graduates and training them in Japanese. Luna: So we're seeing a global competition for finance talent, not just local. Which means the demographic winners — countries with more young people — might gain an edge in financial services. Lucas: Exactly. India is the obvious example. Its bulge of young graduates is a huge asset. Goldman has over 5,000 employees in Bangalore — that's their second-largest office after New York. And it's not just back office anymore — they're doing M&A analysis, valuation work, even client-facing roles for smaller deals. Luna: But if the work moves to India, what happens to the U.S. or European junior banker? Do they become a dying breed? Lucas: I don't think they disappear, but their role changes. The U.S. junior banker will focus more on client relationships, strategic thinking, and oversight of the offshore team. The grunt work goes to Bangalore or Warsaw. The premium is on judgment and communication, not spreadsheet stamina. Luna: That demands a different kind of training, though. And a different kind of person. Are the banks ready for that? Lucas: Honestly, I think they're scrambling. The demographic shift is slow enough that you can ignore it for a few years, but the cumulative effect is brutal. A firm that doesn't adapt will find itself with a hollowed-out middle, overworked juniors, and partners who can't retire because there's no one to replace them. Luna: It's interesting — we often talk about how falling birth rates affect the broader economy: pensions, healthcare, housing. But this is a very specific, very human story inside one industry. Lucas: That's why I wanted to do this episode. The numbers are abstract, but the decisions inside a bank like Goldman — how many analysts to hire, how to train them, how to keep them — that's where the demographic rubber meets the road. Luna: And that's actually a thread I want to pull on for just a second — because this kind of deep-dive, industry-by-industry reporting is exactly what this show does. And it's only possible because of a small group of listeners who chip in each month via buy me a coffee dot com slash fexingo. It keeps the show ad-free and lets us spend the time to really understand how these demographic forces play out in specific sectors. Lucas: Absolutely. No ads, no sponsors — just the economics and the human story behind it. So if you've gotten something out of these episodes, that link is buy me a coffee dot com slash fexingo. And seriously, even a few dollars helps us keep going. Luna: Alright, back to the banks. Lucas, you mentioned the 'missing middle' — is there any evidence that the gap is starting to close? Lucas: A little. I looked at the partnership classes announced this year at the six largest U.S. banks. About 18 percent of the new partners were lateral hires from other industries — consulting, law, even tech. That's up from about 8 percent five years ago. So they're actively importing talent from adjacent fields, not just promoting from within. Luna: That is a big cultural shift. Banking has always been a 'grow your own' industry. Bringing in outsiders at the partner level risks diluting the culture. Lucas: True, but the alternative is not having enough partners to cover the deal flow. And the culture is already changing — younger bankers are less willing to sacrifice everything for the job. The firms that adapt fastest will probably win the talent war. Luna: So what's the one thing you'd tell a 22-year-old considering investment banking today, given all this? Lucas: I'd say the old career path — two years as an analyst, two as an associate, then MBA and VP — is not guaranteed anymore. But the upside is that you can shape your own trajectory more than ever. You might move into fintech, into a corporate development role, or stay at the bank but in a more specialized role like ESG advisory or tech M&A. The key is to keep learning and stay flexible. The industry is changing fast, and the people who adapt will thrive. Luna: And for the banks themselves — what's the biggest risk you see? Lucas: I think the biggest risk is that they don't take the demographic shift seriously enough. It's not a one-year problem. The number of 22-year-olds in the U.S. will keep falling for at least another decade. If banks just try to squeeze more out of a shrinking pool, they'll burn out their best people and lose the talent war to tech and PE. The winners will be the ones who redesign the work and the career path for a world where there simply aren't as many young people. Luna: It's a sobering thought, but also a fascinating one. And it makes me wonder — which industry will we tackle next week? Lucas: Let's just say the hospitality industry, but with a twist — we'll look at how falling birth rates are reshaping the cruise line industry. That'll be a fun one. Luna: Looking forward to it. Until next time.