Careers in Finance: Investment Banking

Investment banking is a fast-paced field dealing with corporate customers every need. The customers for investment banks are often large corporations and even governments.

An investment banking career is one of the most sought after in finance. It’s also one of the most difficult.

What is Investment Banking?

Investment banks service various financing concerns of institutions. They are capital raisers for large companies and also offer advisory services. Different units within the investment bank can facilitate almost any need an institutional customer could need such as a bridge loan, advice on a merger transaction or underwriting a 40 year corporate bond issue. Most investment banks are also commercial banks as the easing of Glass-Steagall has made the two interchangeable. Regulations are starting to divide them but these are still massive institutions.

Investment banks can also be smaller, regional players, called boutique banks. Boutique banks focus on smaller deals specializing in one particular area. These may be in the $20-$30 million deal size but typically not less than $5 million.1

What are the Different Units within Investment Banking?

There are different opportunities one can seek out at a hedge fund. Many people out of business school aren’t too particular about what role they play if offered a position. Here are some of the front-office jobs people exploring careers in finance might consider (we’ll exclude the funds principals since these are often the founders or original seeders of the fund).

Capital Raising & Underwriting

This unit of the investment bank helps entities (companies, municipalities, etc) raise capital through the issuance of securities to the public. When a company “goes public” it has an initial public offering, IPO, where it sells shares, or ownership, of its company to the public. These shares typically get listed on well-known exchanges such as the New York Stock Exchange or the NASDAQ. It is an investment bank that facilitates, or underwrites, the entire transaction. They advise on the size of the offering and recommend a price to initially issue the shares. The investment bank assists before, during and after the IPO.

Before the IPO, an investment banker will join the company on their “roadshow”, where the company “tells its story to investors” in an early attempt to generate buzz and demand for the offering. Roadshows are private presentations to institutional investors, analysts and select clients of the investment bank. The roadshows are completely set up by the investment banks so the offering company can continue to focus on its core business. They usually make presentations at major cities like New York and others including Chicago or Boston depending on the size of the deal. It is the banks job to make sure they can ‘place’ (sell) all the shares in the offering.

During the opening of the IPO for trading, the underwriter works with their floor trader or market maker (Sales & Trading unit) to open the stock for trading at a certain price which is often different from the deal’s offering price. It is the influx of buy or sell orders at different prices that determine where the stock begins trading to the general public.

Once the deal has settled, the proceeds from the IPO go to the issuing company, minus the investment banks fee for arranging the entire deal (typically between 2% and 7% of the gross deal proceeds).2 For a $100 million stock offering, roughly $5 million would be the investment banks fee.

In the future, the investment bank, working with the sales and trading unit, can continue to help the company, either by issuing more stock to the public in a follow-on offering. Or the company may decide to issue bonds instead, or a hybrid of both, convertible bonds (bonds convertible into stock). There are many ways an investment banker can help service the needs of his institutional clients.

Sales & Trading

Sales and Trading units execute large orders for institutional clients. These can be pension funds, hedge funds, other asset managers. The sales and trading division works in conjunction with many different areas of the firm to meet their particular aim.

Traders buy and sell securities either as principal or agent. When they are principal, it is for the firm’s own account. Principal or proprietary, traders have a very high risk, high reward position. Prop traders must also be mindful of managing their risks. They sometimes trade not only stocks and bonds but various types of derivatives including options, futures and swaps. But no matter the asset class, the goal is the same – make money.

As agent, they are executing an order for a customer and often charge a commission for the execution. Market making is a key component of this division. Market makers are tasked with maintaining an orderly market for a particular security. They maintain and update timely bid and ask spreads and trade order flow as to their book’s position. There are market makers for stocks, bonds, ETFs and options. There is sometimes a fine line between principal and agent in market making and firms with restrictions on proprietary trading have to be mindful of this.

Mergers & Acquisitions

The headline grabbing news when a company buys out another comes from the Mergers and Acquisitions (M&A) unit of an investment bank. The M&A unit facilitate transactions where two separate companies come together into one company, a merger. If the merger involves the entire takeover of one of the companies by the either, this is an acquisition or takeover. The reason for a takeover is that the combined entity is more valuable than the two separate entities through synergies. Synergies are benefits a combined company would enjoy, including decreased staff, economies of scale or the sharing of intellectual property, that reduce costs from redundancies. Sometimes mergers don’t work out and the company splits itself into two (or more) parts it is known as a divestiture. The company may also want to sell itself completely, called an ‘exit’. This allows founders and investors to realize profits.

Investment banks offer advisory, legal and services to facilitate the M&A transaction in its entirety. This department gets paid for this in various ways, sometimes with an upfront retainer, a minimum fee or success fees.

What are the Different Investment Banking Careers?

There is a pretty defined hierarchy within an investment bank. Employees usually start as Analysts, then Associates, move on to Executive Director and finally, Managing Director.

Investment Banking Analyst

Besides intern, this is the most junior position within an investment banking division. Analysts notoriously work long hours, especially when there’s a deadline to be met on a deal. Analysts prepare presentations to more senior members of the IB division. They create pitch books and other marketing material for potential new customers or deals. Analysts are maybe most known for extensive financial modelling with spreadsheets. Although analysts attend client meetings, they don’t do much direct interaction with clients.

Investment Banking Associate

Most employees gain access to this position through successful completion of a Master’s program such as an MBA or a Master’s in Finance program. These employees are just one rung higher on the ladder and oversee the work of new analysts. They still don’t do extensive meetings with clients. This occurs at the more senior levels.

Investment Banking Executive Director

The Executive Director, sometimes called Vice President, acts as sort of a project manager or team leader. They coordinate the work of the analysts and associates to make sure they meet the client’s expectations. The Executive Director will be a liaison with clients and do most of the face to face meetings.3

Investment Banking Managing Director

This is the most senior role in an IB division without being a partner. This position does plenty of networking and sourcing new opportunities. More importantly, they spend extensive time with existing clients, maintaining relationships. Often, these executives are specialized in a particular industry they are very familiar with, allowing them to best serve the needs of clients within that industry through advice or fundraising. This position also deals with philanthropic areas and becomes one of the faces of the organization to the public.

What’s the Compensation for Investment Bankers?

Investment bankers command a high compensation. The average salary for an ‘Investment Banker’ is $99,089, according to Glassdoor.4 The average salary for associates rises to $109,716.5 Depending on the year, there is often a bonus attached to your salary figure, in many cases, equal to your salary. Obviously, the more deals and business you bring to the firm, the more you should be compensated. While these numbers are high, the hours of work the jobs require can make the wage per hour seem pedestrian.

How do I Get Hired by an Investment Bank?!

Getting hired by a major investment bank is a challenging endeavor. Your best bet might to be with a smaller, boutique bank. The hiring scrutiny will probably less and they are located nationwide, not just in major cities like New York or Boston.

Receiving a bachelor’s degree is required to work in investment banking, as are certain licenses. If you have trouble getting a foot in the door as an analyst, going back for a Master’s degree in Finance or an MBA with a concentration in Finance may help your chances. Many banks accept business school graduates directly into the associate role, bypassing analyst.

Investment banking is all about networking and getting a job at an investment bank is no different. Let everyone you know that you are trying to start a career in investment banking. You never know how your fortune will end up.