Among go-getters who strike gold before their silver birthdays are theinvestment bankers (aka iBankers). While most know iBankers make big bucks, few have an idea what is it they actually do. Even the websites of investment banks (iBanks) are flooded with difficult financial lingos, which makes it difficult for beginnersto browse through to their functions.
To help you break into the industry, in a simple language here is explained what are investment banks? What does iBankers do? and What investment banking exactly constitutes?
It should be noted, to get started in the industry and put your best foot forward, you can pursue certification and become a certified investment banker. The certification process will not only certify your skills and knowledge, but its learning resources will familiarize you with the field. Now, let’s get the demystification of iBanking started.
What are Investment Banks? — How do they differ from other banks?
Investment banks are institutions thatprovide financial advice to clients. The clients can come from government agencies, large corporations, small businesses, or can behigh net worth individuals, essentially anyonewith a large amount of capital needs.
Although, largeiBanks of the likes of Goldman Sachs do much more than advising. They also raise money for their clients. They have departments dedicated to selling and trading of securities, they provide research about markets, manage clients’ investments and even trade bank’s own capital in the market.
Talking of how iBanks are different from commercial banks. In nutshell, commercial banks are those with whom we interact in our day to day lives. They only deal with deposits and loans for companies and individuals. On the other hand, investment banks are special banks that manage, facilitate and create capital for clients. iBanks deals in purchasing and selling of financial productssay bonds, and stocks; help companies issue IPOs; and play a management consulting role in facilitating their growth.
Bulge Brackets vs. Boutiques iBanks
If you are at all familiar with investment banking terminologies, you must have heard the names, Boutique, and Bulge Brackets firms.
Bulge Bracket (BB)is a slang term for large-scale and most profitable investment banks who have become gods in the world of iBanking.Boutique investment banks are comparatively smaller in scale.
BB typically would have all the divisions (elucidated below) in their firms and would do much more than advising. They would take up financing activities for clients; even invent novel financial products. In short, they are the market makers. Financial markets wouldn’t be as liquid and trading stocks would be hard as ever without them. Their assets run in trillions and they have their footprints in every major country and company.
The cost for this stardom comes in the form of heavy regulation by the government agencies for them,since their activities, even a single report or a statement by them, can significantly affect market stability.
Some of the major global BB firms include Barclays, Citigroup, Deutsche Bank, Bank of America Merrill Lynch, and UBS, among others.
Boutique firms generally have M&A and advisory as their central functions. They don’t have market-making capabilities as BB and their functions are much less capital-intensive comparatively to BB. Due to this they also generally can’t lend. More than dollars, they need brainpower. Some of the top boutique firms are Allen & Co., Lazard Moelis, PJT Partners, and so on.
Becoming a certified professional can help you carve a shining career in this bustling field. Some of the juggernaut investment banking certification bodies include Institute of Management Accountants (IMA), Investment Banking Council of America (IBCA), and United States Private Equity Council (USPEC), among others.
Divisions in iBanking: What do investment banks do?
Investment banks have three types of offices, namely, front, middle and back.
The front office includes direct client-facing activities and contains most revenue-generating divisions. Its professionals are the ones who are paid six-figures in entry-level salaries.
Back and front offices of iBanks takes care of operations and Information Technology and include risk and treasury management. The activities performed by back and front office professionals fall in compliance, management, finance, operations, security, technology, and other such departments.
Key Front-Office Divisions in Investment Banking
- Investment Banking (including M&A)
This division advice clients, including government agencies and private corporations, on two aspects — large financial transactions like acquisition, sale or divestiture; and raising money through M&A (via private or public debt & equity markets).
- Sales & Trading
Sales & trading division is involved in trading publicly listed securities such as stocks, bonds, currencies, and other commodities. It serves as a crucial division and performs “market-making” activities in the financial market.
- Proprietary Trading
Proprietary trading is one of the greatest sources of profits for investment banks wherein iBankers trade securities with firm’s own capital, instead of doing it on the behalf of a client.
Research department produces analysis and insights, related to industries, companies, securities, and even economies. This division is typically bifurcated into internal and external research. Chinese Wall is a concept vital for research division. This wall means to separate people who possess non-public information from those who only hold public information. For instance, a research analyst should not know about the internal M&A deal an iBanker might be working on as it impacts research credibility. Compliance departments take these matters with extreme seriousness.
- Asset Management and Private Banking
This division manages assets of institutions like foundations, corporations, governments, pension funds, or individuals. It may or may not manage their investments in financial assets or their alternative investments.
So, this was about iBanking in short. Not all iBanksmay have all these divisions. If you are interested in a department, you can dive deep in its work and know about the roles played by Analysts and Associates therein.