What is Investment Banking and why it’s Important 

What are investment banks and what is investment banking? Financial advisors and institutional investors will notice this is one of the three common types of banks, with the other being retail and commercial banks. The fundamental differences between them are the customers they serve and the services they offer. In a nutshell, retail banking institutions serve the everyday banking needs of people, and commercial banks serve corporate entities. Meanwhile, investment banks offer a range of financial services to pension funds, private equity funds, hedge funds, government, corporations, and other financial institutions.  

It’s important for advisors to know these distinctions. For one, advisors can see what career options are available to them, and what services they can avail of for their clients. Knowing about investment banking services can also help advisors decide whether they can shift to working for these banks.  

Such knowledge may even serve as motivation for advisors to set up their own company, like an RIA practice, or create products or services in their firm that can set themselves apart.  

In this article, InvestmentNews tackles questions like what is investment banking and how it works, the types of investment banking, and other crucial information about investment banking.  

Introduction to Investment Banking 

What is investment banking? Simply defined, investment banking is a division of a bank or other financial institution that serves corporations, government-owned companies, government offices and institutions. 

Generally, investment banks’ purpose is to assist in large, complicated financial transactions.  

If you have any clients that own a large business and are new to investing, it’s important to know which investment banks and which of their services can benefit them most. For instance, investment banks can provide advice on how much your client’s company is worth and how best to structure a deal, whether it’s an acquisition, merger, or sale.  

Investment banks or investment banking divisions of banks may also issue securities to raise capital for the client groups. They can also do all the necessary documentation for the Securities and Exchange Commission (SEC), before a company goes public.  

Some of the most common services an investment bank can offer includes:  

• Mergers & Acquisitions (M&A) – This is an advisory role that the investment bank takes on for both buyers and sellers of businesses. A good investment banker must manage the M&A process from beginning to end and ensure this process goes smoothly. 

• Underwriting – Also known as capital raising, underwriting groups work between investors and companies that want to raise money or go public via an IPO.  

• Sales & trading – Involves matching buyers and sellers of securities in the secondary market.  Sales and trading groups here act as agents for clients and trade the firm’s own capital.  

• Asset Management – Entails managing investments for a diverse range of investors, which can include institutions and individuals, in a wide range of investment styles. 

• Equity Research – This department of an investment bank does all the research, or “coverage”, of securities. Its function is to assist investors in making sound investment decisions and supports trading of stocks. 

The largest investment banks are subsidiaries or affiliates of even larger banking institutions, with many becoming household names. The top investment banks today are Goldman Sachs, JPMorgan Chase, Bank of America Merrill Lynch, Morgan Stanley, and Deutsche Bank. 

The Types of Investment Banks 

Investment banks are typically classified in terms of their size, status, industry focus, and region. There are four main types of investment banks, namely:  

1. Bulge Bracket Investment Banks (BBs) 

The largest global banks that offer all the products and services and operate in all regions fall under this category. BBs also work on the largest deals (often those over $1 billion USD) and have the widest brand-name recognition.  

Most people would say that the bulge-bracket banks are:  

• JP Morgan (JPM) 
• Goldman Sachs (GS) 
• Morgan Stanley (MS) 
• Bank of America (BofA) 
• Citigroup (Citi) 
• Barclays (BarCap) 
• UBS 

2. Middle Market Banks (MMs) 

These are investment banks with a variety of products and services and have a wide geographical presence, but they tend to work only smaller deals (worth less than $1 billion).  

Examples of middle-market banks include:  

• Jefferies Group 
• Houlihan Lokey 
• William Blair & Company 
• Lincoln International LLC

3. Elite Boutique Banks (EBs) 

This is a subset of “boutique banks,” and are smaller than the bulge bracket banks. Elite boutique banks specialize in areas like M&A and Restructuring rather than underwriting. They may, on occasion, work on very large deals. EBs can vary in terms of geographic reach and industry specialization. They are considered “elite” because they are often as prestigious as the BBs while also offering top-notch exit opportunities.  

Examples of elite boutiques include:  

• Lazard 
• Evercore 
• Moelis 

4. Industry-Specific Boutiques (ISBs) and Regional Boutique Banks (RBs) 

This type of investment bank focuses on narrow industries like real estate, healthcare, or technology, and/or only operates in one location. In most cases, ISBs or RBs also only work on much smaller deals (e.g., amounting to less than $100 million).  

Some examples of this type of investment bank include:  

• Rothschild & Co. 
• Lazard 
• Guggenheim Partners 
• Evercore 
• LionTree 

Is the job of investment banker difficult? 

The job of an investment banker can be very challenging. For starters, this job requires you to have a lot of experience. The ideal candidate for an investment banker position would be someone competitive, detail-oriented, and can handle a lot of pressure. These, along with being able to “read” the investment climate before making any moves and a good knack for negotiating the best outcomes makes the job of investment banker difficult indeed. 

Skills like these are essential, since the role of investment banker involves assisting corporations, government, and other organizations to plan and manage large undertakings. Investment bankers must process a lot of information quickly and do risk management efficiently before their client moves forward with any of their plans.  

Businesses and institutions turn to investment banks for advice on how best to plan their development. Investment bankers, with their expertise and experience, must come up with customized recommendations based on their client’s circumstances and the present state of economic affairs.

Crucial Investment Bank Functions 

Why is investment banking important? Investment banks can be key drivers of the economy, as they provide support to some of the largest companies engaged in vital industries like:  

• Healthcare 
• Oil and gas 
• Real estate 
• Infrastructure 
• Consumer retail 
• Metals and mining 
• Chemicals 
• Sports  
• Renewable energy 
• Maritime and shipping 
• Power and utilities 
• Technology  
• Public finance 
• Financial institutions 

And the list goes on. Investment banking services are often classified as front, middle, and back-office support services.  

• Front Office services drive revenue generation and can include corporate finance, sales and trading, and research. 
• Middle Office support services include processes related to revenue generation, such as risk management and treasury services. 
• Back Office support includes roles that exist regardless of the revenue, including compliance, accounting, information technology (IT), and HR. 

Front Office	Middle Office	Back Office
Corporate Finance Industry Groups Product Groups	Risk Management Treasury	Accounting Compliance  Human Resources (HR) services Technology (IT) services
Sales & Trading Equities Fixed Income

Finance professionals should also bear in mind that investment banks don’t only offer jobs or career paths in these divisions alone. Some investment banks can specialize in other products or services like foreign exchange, equities, research, and more. You can get a better idea of how investment bankers work and what your career options may be like in this video:  

What are the essential skills for investment banking?  

This kind of work mainly involves a lot of valuation and financial modeling and valuation. Whether for underwriting or M&A activities, Analysts and Associates at banks spend much of their time creating financial models and using various valuation methods to advise their clients and complete deals. 

These are the skills that are essential for investment bankers and investment banking:  

• Financial modeling – This can involve building 3-statement models, discounted cash flow (DCF) models, LBO models, and other types of financial models. 
• Pitchbooks and presentations – This consists of building pitchbooks and PowerPoint presentations to pitch ideas to prospective clients and win new business. 
• Business valuation – Assessing a business’s value with a wide range of valuation methods such as comparable company analysis, precedent transactions, and DCF analysis. 
• Relationship management – This involves working with clients to successfully close a deal and make sure clients are happy with the service being provided. 

Preparing transaction documents

Investment bankers should be good at preparing the relevant documents for transactions like:  

• confidential information memorandum (CIM) 
• investment teaser 
• term sheet 
• confidentiality agreement 

Negotiating skills

This is a major skill requirement, as negotiation tactics between buyers and sellers help clients maximize value creation. 

Business development and sales

An investment banker is expected to be able to find and meet with prospective clients to pitch them ideas, offer their services, and provide advice that can ultimately win new business. 

What are my career options in investment banking?  

Meticulous and highly motivated finance professionals can look forward to a lot of career possibilities in the investment banking field. To illustrate, here’s what career progression can look like for an investment banking professional at a bulge-bracket investment bank in New York City. Note that the values are only estimates for base salaries and total yearly compensation, which can vary from firm to firm.  

Position	Age Range	Est. Base Salary	Total Compensation	Timeframe for Promotion
Analyst	22-27	$100 – $125k	$140 – $190k	2-3 years
Associate	25-35	$175 – $225k	$225 – $425k	3-4 years
Vice-President	28-40	$250 – $300k	$450 – $650k	3-4 years
Director/SVP	32-45	$300 – $350k	$550 – $750k	2-3 years
Managing Director	35-50	$400 – $600k	$600k – $1.6M

Aspiring investment bankers should keep in mind that their total compensation will depend on a few factors like overall market conditions, their personal performance as well as their team’s performance.  

For example, a Managing Director or team member who closes no deals during a fiscal year will make no additional bonuses, while an MD who closes several large deals can earn millions of dollars in bonuses.  

Which type of investment bank should I apply at?  

As much as possible, try to get hired at any of the top investment banks, namely the bulge-bracket banks. Not only is the job high-status, it’s also high-paying – just remember it will be a high-pressure job as well! Working at a bulge-bracket bank like Goldman Sachs or Morgan Stanley is very prestigious, not to mention very rewarding.  

If you’re fortunate enough to get hired at a bulge-bracket bank and earn a bonus, sometimes a significant portion of your bonus at the mid-to-senior levels will be paid in stock. This bonus can appreciate over time and give you a hefty golden parachute once you divest these shares or retire. This is one of the reasons why you should find a job at any of the bulge brackets (BBs). 

Finance professionals who are passionate about their work and get into the investment banking sector will hardly want for personal or financial fulfillment. The potential for high earnings is there, so it’s more a matter of whether the individual finance professional can take the pressure and is truly passionate about working in a sector that’s a big driver for the economy.  

Savvy financial advisors who want to get into investment banking should assess what skills, experience, knowledge and certifications they need, then obtain what’s necessary to pursue this exciting career.  

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