What is investment banking? Is it investing? Is it banking? Really, it is neither. Investment banking, or I-banking, as it is often called, is the term used to describe the business of raising capital for companies and governments and advising them on financing and merger alternatives. Capital essentially means money. Companies need cash in order to grow and expand their businesses; investment banks sell securities (debt and equity) to investors in order to raise this cash. These securities can come in the form of stocks, bonds, or loans. Once issued, these securities trade in the global financial markets.
Investment banks acts as intermediaries between an issuer of securities and the investing public, distributing an offering through their dealer networks or direct sales to clients. Services offered, in addition to underwriting, typically include asset securitization, structuring corporate mergers and acquisitions, and arranging private placements of debt or equity securities. When working with clients, an investment banker offers his or her expert advice and counseling on pricing securities to be offered for sale, filing the registration documents with government agencies, managing the sales distribution syndicate, and communicating periodically with the investor community.
Investment banks, in addition to the services mentioned above, have an array of investment products and services which they offer clients through private banking or wealth management divisions, or through their broker-dealer networks. Clients have a wide variety of investments to choose from, including mutual funds, separately managed accounts, private equity, and hedge funds.
Investment banks, too, see their fortunes rise and fall with the rhythm of the economy. An investment bank’s lifeline is its ability to gauge the market cycle months, if not years, in advance to keep its deal pipeline flowing. The largest banks have a competitive advantage because large transactions require the financial muscle that only a handful of deep-pocketed investment banks can offer.
In the largest investment banks, typically called the bulge bracket banks because they are active players in every part of a new securities offering, there are several distinct career fields: equity research, fixed-income research, sales and trading, capital markets (the classic mergers and acquisitions area), and asset management for retail (individual) investors and institutional clients (pension funds, governments, etc.). Boutique I-banks, smaller firms that specialize in one or more fields, will concentrate in two or more of these functional areas. Some of these positions offer plenty of mobility, most often from analyst positions into capital markets or asset management.
Careers in investment banking can be extremely lucrative. New graduates with MBAs can earn $100,000 to $300,000, and they also receive healthy bonuses. Managing directors earn minimum base salaries of $500,000 (but many earn millions of dollars a year) and annual bonuses of $250,000 to $500,000, according to WallStreetOasis.com, a financial industry career planning Web site.
The U.S. investment banking industry includes about 3,400 companies with combined annual revenue of about $40 billion in 2018, according to Dealogic, a financial markets platform. Worldwide, investment banks generated $81 billion in revenue in 2018. The 50 largest firms generate more than 90 percent of the industry’s revenue, according to Hoover’s, a business research company. Major investment banks include Goldman Sachs, Lazard, Bank of America's Merrill Lynch, Morgan Stanley, and Jefferies.
The investment banking industry is facing increased disruption as its traditional profit centers are eroded by competition from financial technology companies, which use technology to provide some investment banking services to customers; increasing regulations (in some countries); competition from dedicated investment management firms such as Vanguard; and other developments. “From initial public offerings, to mergers and acquisitions, to research and trading, investment banks are getting smaller, leaner, and scrambling to keep up with innovations,” according to Killing the I-Bank: The Disruption of Investment Banking, from CB Insights, a company that “analyzes data on private companies in emerging industries to provide predictive intelligence.”
- Exciting, fast-paced work environment. You’ll get a chance to work on demanding, but interesting, deals.
- Financially rewarding. New graduates with MBAs can earn $100,000 to $300,000, and have the potential to receive lucrative bonuses based on their performance and the performance of their firms.
- Excellent training programs. Most investment banks provide quality on-the-job training and continuing education programs that will help you to hone your skills and obtain experience with high-profile transactions.
- Many potential career paths. Skilled and experienced investment banking professionals can either advance to managerial positions at their firms or move on to work at private equity, venture capital, or financial consulting firms, or launch their own businesses. Even if you find out that the world of investment banking is not for you after a few years, the experience you obtain working at a high-profile company will look great when you apply for finance-related careers at corporations, nonprofits, or financial regulatory agencies.
- Interesting coworkers. Investment bankers are typically extremely smart and multi-faceted. Although work hours can be long in this business, many investment banking pros cite the chance to work as a member of a team of like-minded people as one of the most rewarding aspects of the industry.
- Entry-level opportunities in top-tier firms may be limited to those with outstanding credentials as firms continue to trim operating expenses to meet profitability goals.
- The work week in investment banking is long, often exceeding 50-60 hours (including weekends), limiting opportunities for social activities outside the working environment. New hires should expect to have projects that are due at 9 a.m. the next morning assigned to them as they are literally walking out the door at the end of the day. Higher-level workers will be expected to jump on a plane or train at a moment’s notice to help close a deal.
- Lack of geographic freedom. Job opportunities are centered in New York City and a few other money centers in the world such as London and San Francisco. If you don’t already live in one of these cities, you may have to move to land a job.
- Demanding work environment. Investment banks can be a tough place to work, with unforgiving bankers and expectations through the roof. Although decreasing, stories of analyst abuse run rampant and some bankers come down hard on new analysts simply to scare and intimidate them. Entry-level workers should expect to do a lot of grunt work—booking meeting rooms, organizing client dinners, photocopying, and fetching coffee.
- Diversity issues. Investment banks have had a long reputation of being unfriendly to minorities and women (especially in terms of providing opportunities to advance to executive-level positions). Minorities should expect to be trailblazers at some companies, although the larger firms such as Goldman Sachs and Credit Suisse have launched diversity programs to increase the number of women and minorities in the field.
- Chief Executive Officers
- Chief Financial Officers
- Compliance Managers
- Financial Analysts
- Financial Institution Officers and Managers
- Financial Institution Tellers, Clerks, and Related Workers
- Financial Quantitative Analysts
- Financial Services Brokers
- Investment Bankers
- Investment Banking Analysts
- Investment Banking Associates
- Investment Banking Sales Brokers
- Investment Banking Traders
- Investment Fund Managers
- Investment Underwriters
- Mergers and Acquisitions Attorneys
- Private Bankers
- Regulatory Affairs Managers
- Regulatory Affairs Specialists