Most of us have heard of investment bankers, but do we really know what one of Wall Street’s most lucrative industries entails? The world of investment banking is a competitive one with high stakes. The question on the mind of most candidates is what do investment bankers do? How do I get in? And once you’re in, what will it be like? What are the qualifications to become an IB analyst and what does an IB analyst do on a day-to-day basis? This blog post will answer these questions and more!
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What is an investment bank?
An investment bank is a financial institution providing a range of services from financial consulting to underwriting, to brokerage investment in derivative instruments and securities, and to advice on mergers and acquisitions.
Most investment banks are found on Wall Street and in major cities such as London, Chicago, Frankfurt and Tokyo. While the industry has been under scrutiny with the 2008 financial crisis, it is still one of the most lucrative industries out there today! About $400 billion is invested every year by these institutions just to keep them afloat. And that’s just the tip of the iceberg…
Investment banks are responsible for raising money through underwriting new securities and conducting market research on firms, industries or countries. They also advise companies about mergers & acquisitions (M&A) as well as provide financial consulting services to both governments and private sector clients. Finally, they carry out a wide range of activities related to the trading of securities, such as acting on behalf of clients who wish to purchase or sell financial instruments.
How do investment banks differ from retail banks?
While investment banks are responsible for the issuance of new securities, retail banks focus on deposit accounts and lending services. Retail banking is important to maintain a healthy economy by ensuring that people have access to capital in order to purchase homes, cars or start businesses. However, without an active investment bank system it would be difficult for companies/individuals with promising ideas to access the necessary capital.
This is where investment banks come in! Investment banks raise money from investors and companies by selling securities such as stocks, bonds or derivatives that represent a claim on an underlying asset (e.g., property). The funds raised are then often lent out again to “clients”, usually other businesses who want to invest in something else such as equipment, property or research and development.
This is the reason why some people consider investment banks to be “middlemen”, because they link those who want to sell (the issuer) with those who wish to buy (investors). They make a profit by charging commission fees for their services and/or making new markets in the securities they deal with.
Investment banks are NOT commercial or retail banks, which make money by offering loans and accepting deposits from customers. Their role is to support the global capital market system but it’s important not forget that even though investment banking isn’t as closely tied to the day-to-day lives of ordinary people – through their actions, they can have an impact on your life too.
The next time you receive a phone call from the bank asking if you would like to take out another loan or invest in their savings account, remember that without investment banks there might be fewer of these opportunities available!
Investment banking by division
Most investment banks divide their work staff among working groups assigned to focus on particular business sectors or markets. Each industry covering group is headed by a manager who leads a department comprising directors, vice presidents associates and analysts. It is the managers’ responsibility to solicit new business and serve existing customers within their remit. Individual separate teams are typically organized within an industry-encompassing group to deal with specific client projects. A task includes preparing proposals and ideas for clients, preparing presentation books introducing new products or services preparing industry reports and coordinating transactions. Projects can be assigned to different teams within various areas such as ‘corporate finance’ or ‘mergers and acquisitions’.
How do investment banks make money?
Most of the revenue generated by investment banks comes from commissions and underwriting fees. The rates for these services are usually based on the size of the deal, its complexity or riskiness, how much an institution has raised in total before and so on.
Investment banks also create products that investors need to invest large amounts without having them sit around in a bank’s vault or safety deposit box. Some of these financial instruments include complex derivative products.
In addition to this revenue source, an IB can earn money through asset management services by managing portfolios for individuals and organizations that have entrusted them with their funds in the form of investment accounts. The more assets under management means the bigger the potential revenue for an IB (however, note that not all investment banks have an asset management arm).
Most notable investment banks
The big four are JPMorgan, Goldman Sachs, Citigroup and Morgan Stanley. Others include UBM, Barclays, Credit Suisse and Deutsche Bank There are around 150 global investing banks. This is a bank offering a full array of banking services to corporations and wealthy individuals.
Roles and hierarchy within an investment bank
Investment banks are typically very hierarchical in terms of the number of senior management titles. They include executive directors (ED) and non-executive chairman, managing directors (MD), Vice Presidents (VP), Associates, and Analysts, among others.
Analysts and associates are the entry-level employees who work their way up to vice president (VP). Directors are managers with specific job functions within an industry coverage team. Managing directors usually have a number of direct reports while executive directors may also have other MDs reporting to them depending on how big or small the business unit is. The top executives in IBs are typically the CEO and CFO although the chairman has a lot of say in what happens within his or her bank.
Analysts and Associates
IB Analysts and Associates are junior level employees who are typically graduates or have just completed their MBA. They pass through three main areas of the bank within which they perform specific functions to gain experience before moving up the ladder.
Vice Presidents (VP)
Vice presidents are senior level employees who work under the managing director and executive directors. They lead teams of analysts, associates and other VPs to undertake industry coverage group projects within their remit.
Managing Directors (MDs) & Executive Directors (EDs)
These levels sit at the top of an IB hierarchy. Managing directors are senior managers who lead teams of VPs and other MDs, while executive directors manage the business unit that they oversee in an IB or report to another director in a wider group.
Chairman & CEO
The chairman oversees all areas of operations within his bank while the CEO is responsible for day-to-day management and business strategy.
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What do investment bankers actually do?
The term “investment banker” can be a little misleading because investment bankers don’t actually invest money. Instead, they provide capital markets advisory services to various companies and investment funds. For example, some investment bankers work in mergers and acquisitions (M&A) while others specialize in capital markets or corporate finance. However, typically when people refer to an investment banker they mean one who works in arranging capital markets and M&A deals.
Investment Bankers: Sell-side
Sell-side bankers are involved in capital markets advisory, which means they work with various sellers to help them sell their companies. They are the “sellers” on the market for M&A, and their clients are typically private equity firms or large corporations looking to dispose of their businesses or specific business lines. Since sell-side bankers have extensive knowledge of industries that will be attractive targets for buyers, they are often involved in M&A deals before they happen.
Investment Bankers: Buy-side
Buy-side bankers are the “buyers” of the market for M&A deals. Their clients are typically companies or investment funds that want to make an acquisition and require a bank’s assistance in doing so. Buy-side bankers will often work with sell-siders at their firm, as well as other banks on large transactions. For example, if a large investment fund wants to acquire a company, it would likely work with multiple banks for this deal.
Main Responsibilities of an Investment Banker
A large part of an investment banker’s job is managing relationships with their clients. This includes sitting down with them every week to discuss current market conditions, deal pipelines and how various companies are performing in the marketplace. The ultimate goal of client management is to have a thorough understanding of each client’s company, which will allow the banker to better advise them on transactions.
Financial modeling & valuation
Financial modeling, in general, refers to the creation of financial statements and projections that illustrate how a company’s business model works with various assumptions about its future performance. For example, if you want to build out an investment thesis for one of your holdings at a hedge fund, you would first need to build out a model.
A large part of investment banking is financial modeling and valuation. These are the calculations that bankers make to determine what a company is worth, whether it has good growth prospects in its particular industry or how much investors should pay for shares (in equity research). Financial models are usually built by analysts and associates, with the oversight of VPs and MDs.
Research and analysis
Research and analysis is another important aspect of an investment banker’s job. These professionals read through various market reports, talk to industry experts and speak with their teams in order to gain a thorough understanding of the companies they work with. A large part of these bankers’ responsibilities is producing written financial analyses for clients as well as sell-side research on prospective targets.
Compliance and legal affairs
Investment bankers work closely with compliance and legal to ensure they are following all internal rules, laws and regulations that could affect their operations or transactions. They have strong working relationships with the compliance team in order to avoid potential issues before they arise. In addition, investment banking teams also need a good understanding of legalities to ensure they are building solid transactions.
Preparing investment presentations
Investment bankers are expected to produce investment presentations for their clients, which can range from three slides to 200 or more. These presentations must include an overview of the target company’s business model and products/services, as well as its financials (balance sheet, cash flow statements). The goal is simply to provide enough information so that a decision-maker can understand the company, its valuation, and the presented project. Investment presentations are usually done by analysts and associates, with the oversight of VPs and MDs.
Last but not least, investment bankers are expected to complete administrative tasks as assigned by their managers. These professionals spend a large part of the day typing up memos and emails for various internal departments (e.g., legal & compliance).
The Bottom Rungs to the Top of the Investment Bank Corporate Lads
As you climb the corporate ladder at an investment bank, you typically move away from labor-intensive tasks such as analysis and producing reports. In addition to the different sorts of work assigned to different job titles in the hierarchy of work, one can also see that the work performed by investment bankers varies depending on various types of clients.
What are the hours like?
It is no secret that investment banks work long and hard (and most people think they’re crazy). While working in finance means you’ll be putting in a lot of time to do well at your job, it’s often easy to forget how much work is involved in investment banking.
First, you are expected to be available 24/365 for your clients (i.e., the companies or funds that hire you). You may have to make yourself readily available throughout weekends and holidays when deals could happen at any time. Second, since there can be so many moving parts to a deal you’ll have to work long hours throughout the entire process.
You should expect to put in at least 80-100 hours/week during periods of heavy activity, and 50-60 hours once things start slowing down again. Finally, there are also times when weekly average can be as high as 120-150 hours! Although this may seem like a lot, the payoff of high compensation and bonuses is worth it for many people.
Why so much work?
The kinds of services investment bank offering their clients require a good deal of time and effort when they are ready for the real work. It becomes imperative to make a single person accountable for major tasks to avoid confusion and element of mistake ultimately leading to long working hours for an investment banker. Investment bankers work flexibly but they have clearly separated roles and responsibilities, and their roles and functions are clear.
What do sell-side and buy-side investment bankers get paid?
The compensation structure at an investment bank is very different than that of other finance professionals (e.g., business analysts or corporate finance). Due to the fact that there is a lot of competition in this field, compensation is very high. You can expect to earn anywhere from $100k – $200k at the junior level (i.e., entry-level associate). If you perform well and move up quickly through the ranks, your total pay could be millions throughout your entire investment banking career!
Bonuses are also a big component of investment bankers’ take-home pay. While base salaries at investment banks are high, the real money comes from bonuses. Since there is so much competition and turnover in this profession, you can expect to receive a very generous bonus if your work leads to successful deals for your firm (and ultimately you). Bonuses can represent up to 30-50% of your total compensation, or even more for top performers.
Are you suited to be an investment banker?
Investment banking is a difficult profession to break into, but if you are interested in the field it may be worth spending some time studying up on these topics. While not everyone has what it takes to become an investment banker (e.g., you must have excellent interpersonal skills), those who enter this career path will find that their analytical and financial skills make them well suited to this role.
Investment banking skills
The most important investment banking skills are :
– Ability to work long hours (80+/week)
– Attention to detail and strong analytical skills
– Good communication, interpersonal & teamwork skills
– Financial acumen and proficiency in accounting
– Financial modeling in Excel, Python, and other analytical programs
– Presentation skills with Power Point
Education Training & Certification
The most common educational requirement is a bachelor’s degree.
While not all investment bankers have an MBA, those with this designation typically rise to the top of their field and can command even higher salaries than those without it. If you are interested in going down this path, there are many online courses that may be helpful for your career growth as an investment banker.
How long does it take to become an investment banker?
Aspiring investment bankers can typically obtain a top-level position after graduating a four-year degree. The most common degree achieved with masters degree is business management. Most full-time MBA schools add two years to an educational track.
How do I get into investment banking?
What’s the typical career path?
Analyst > Associate > VP /Director. Once you have a few years of work experience, it is fairly easy to move around within an investment bank and get promoted. There are not too many rules about where one can be placed in terms of geography or product coverage (e.g., M&A, debt, equity), so you will have a lot of flexibility.
Investment banks hire new college graduates as analysts and typically pay them an annual salary of $90-110k, plus bonus, depending on the bank. After two years or so they are promoted to associates where their compensation jumps up from around $150k/year, plus bonus.
Internships are key
Internships are extremely important. If you want to be a sell-side investment banker, having an internship at one of the major banks is almost essential; it also helps if you interned in college as well (e.g., Goldman Sachs). You should start applying for entry level positions as early as your junior year in undergrad and try to get an internship with one of the major banks. If you do not have any relevant work experience, then applying for internships is a good way to start building your resume.
Preparing for Investment Banking Interviews
The number one thing is preparing for both technical and behavioral interview questions. The interview process can get very stressful and it is primordial that you take the time to understand the type of questions recruiters and MDs will ask you. Once you understand the typical interview structure, you should spend a lot of time prepping and memorizing key concepts and terms.
Remember that investment bankers are looking for really smart people who can handle a lot of responsibility and work long hours (up to 100+/week, especially at bulge brackets). Therefore, you will need to demonstrate your ability to excel under pressure. Highlight projects where you had significant responsibilities and point out how you were able to manage them well.
To maximize your chances at performing under pressure, you should avoid last-minute preparation. Make sure you start studying early and give yourself time to live and breathe investment banking. If you’re not sure where to start, take a look at our Finance Interview Instant Qs App, which helps you prep for interviews daily with hundreds of real-life interview questions.
Common misconceptions about investment banking
Many people have a misconception about what investment bankers do and how they spend their time. While many believe that this profession is all about making deals, it’s important to realize that a large portion of an investment banker’s job involves research, financial modeling, and preparing sales pitches (i.e., staying up-to-date on every industry out there).
You should also know that the hours and travel involved in investment banking can be quite demanding. For example, you may have to fly on a chartered plane for business several times per month (or even every week), as well as attend conferences and meetings around the country or globe.
On the other hand, investment bankers also have some downtime. You can expect to have a lot of flexibility during slower periods, as well as on the weekends (sometimes…). In addition, there are also many perks that come with this job such as expense accounts and company cars!
The job outlook for investment bankers is very good. In fact, the average starting salary for fresh college graduates has increased significantly during the Covid-19 pandemic. Banks are battling hard to get their hands on Excel wizzes from top universities. It has never been a better time to become an investment banker.
Salary increases are also a good indication of how much banks value experienced analysts and associates as well. While you can start out with a base salary at $125k/year before bonus, this number is likely to increase significantly after you work there for a few years.
The bottom line
Investment bankers are middlemen advising large corporations, governments, and wealthy individuals on various types of capital markets and M&A transactions.
Working in investment banking can be very rewarding, but it’s not for everyone. If you’re the type of person who thrives when juggling multiple tasks and responsibilities (and when there are no excuses to delays), then this industry might just be perfect for you!
You should start applying for entry level positions as early as your sophomore year in college. If you are interested in bulge bracket banks, make sure to check out our finance interview questions to help you prep for interviews!