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What Is an Investment Banker?
Investment banking is a draw for many interested in a Wall Street career, given the profession’s handsome compensation. But the job title says nothing about what an investment banker actually does. So, what do investment bankers do?
Investment bankers are financial advisors to corporations and, in some cases, to governments. They help their clients raise money. That may mean issuing stock shares, floating a bond issue, negotiating the acquisition of a rival company, or arranging the sale of the company itself.
That gives investment bankers a central role in the preparation of initial public offerings (IPOs) by young companies preparing to go public. They also work with established companies that want to raise a large amount of cash.
When the capital markets are doing well, investment bankers tend to do well. More money and more business activity generate more profitable projects for investment bankers and their clients.
Key Takeaways
- Investment bankers help companies and other entities raise money for expansion and improvement.
- They are brought in to manage a young company’s initial public offering (IPO) or an established company’s new round of stock.
- They may also prepare a bond offering, negotiate a merger, or arrange a private placement of bonds or stock shares.
- Investment banking is a highly paid but highly stressful profession.
The Roles of the Investment Banker In Depth
Investment bankers advise, negotiate, and plan business deals. Below is an overview of the main types of deals they are involved in.
Arranging Financing
If a large company wants to build a factory, it probably doesn’t have the cash on hand to do it. It may decide to issue a bond to raise the money to proceed with the project. The cost of the bond will be repaid from the increased production generated by the new factory.
Similarly, a government may need to finance the construction of an airport, a highway, or any other large municipal project. If it issues a bond, it can do the work now and repay the bond from future tax revenues.
In either case, an investment banker may be brought in to arrange for the financing. The investment banker would plan the bond issuance, price it appropriately, complete the required U.S. Securities and Exchange Commission (SEC) documentation, and help market the bonds to buyers.
Equity Financing
The most cost-efficient way for companies to finance their growth and expansion is by selling either bonds or stock shares. The investment banker also plays a role when it comes to arranging the sale.
Suppose a young company decides to raise money for its expansion by launching an initial public offering, or IPO. It would first hire an investment banker to put together a prospectus for potential investors explaining the terms of the offering and the risks it carries.
The offering then has to be managed through the process of marketing to investors, explaining to the media, and gaining approval from the Securities and Exchange Commission (SEC).
Correctly pricing the offering is crucial. If the shares are priced too high, the public may not be interested in buying them and the IPO will be a very public flop. If the shares are priced too low, the investment banker is leaving money on the table that could have gone to the client.
The investment banker plays a leading role through each step of this process.
Underwriting Deals
When arranging capital markets financing, investment bankers often undertake the underwriting of the deals for their clients. This means taking on much of the risk by buying the shares outright from the issuers and then selling them to the public or institutional buyers.
Investment bankers sell the shares at a markup to generate profit for their employers. The difference between the purchase price and the markup price is called the underwriting spread.
Typically, a lead investment banker works with a group of investment bankers called a syndicate to underwrite an issue so that the risk is spread out among several players.
In some cases, the investment banker may merely act as a go-between and not take on the underwriting risk. In this case, the investment banker might arrange to sell some of the securities and get paid on a commission basis for the number sold.
Arranging Private Placements
Not all companies want to sell stocks or bonds on the open market. Investment bankers also help clients who prefer to raise capital through private placements. In such cases, the investment banker is expected to have the contacts and the credibility to get the sale done.
For instance, a company could sell an entire offering of bonds to a single institutional investor such as an insurance company or a retirement fund. This can be a faster and easier way to raise money. The government considers institutional investors to be more sophisticated than individual investors, so there are fewer regulations for private placements.
Negotiating Mergers and Acquisitions
Acquiring or merging with another company is generally a drawn-out process of planning and negotiation. Investment bankers often have an advisory role in that process, particularly when it comes to arriving at a fair price for the deal.
Mergers and acquisitions can involve lengthy battles with investment bankers on both sides of the table evaluating a series of offers and counter-offers.
Conflict of Interest Issues
Investment bankers unquestionably help grease the wheels of capital markets, but they have attracted considerable criticism while doing it. The potential for conflicts of interest is at the center of much of that criticism.
Wall Street’s biggest financial powerhouses have an investment banking division, a securities research division, and a trading division. There is supposed to be a so-called Chinese wall separating these divisions and limiting communications between them.
The SEC has approved rules to address conflicts of interest between a firm’s investment banking business and its securities research activities.
Investment bankers have been accused of pressuring analysts to favorably rate securities to please their clients and generate more investment banking business.
Another conflict of interest can occur if investment bankers, who have access to confidential information from clients related to their business and prospects, pass information to their firm’s traders. Traders can exploit this insider information for an unfair advantage.
The Chinese Wall
The invisible barrier that is supposed to separate divisions of an investment bank in order to avoid conflicts of interest.
Down Times in Investment Banking
Wall Street and many of the larger-than-life players in it attracted the ire of the world following the 2007–08 financial crisis. The role of these masters of the universe types in the crisis led to greater scrutiny and regulation of the financial sector. The crisis, which came to a head after investment bank Lehman Brothers filed for bankruptcy in Sept. 2008, exposed the underbelly of Wall Street.
Although the luster of being a big financial sector hotshot was tarnished somewhat as a result, careers on Wall Street remain a draw for top graduates.
Investment Banking Demographics
Diversity figures for investment bankers specifically are not released, but the top jobs at the nation’s leading banks are still dominated by white men.
According to data provided to the U.S. House Committee on Financial Services, about 17% of members of boards of directors identify as minorities, compared to 40% of the U.S. population. About 29% are women, compared to 50% of the population.
None has a chief diversity officer who reports directly to a CEO.
At the senior executive level, white people fill 81% of the jobs, compared to 19% held by racial and ethnic minorities. Men hold 71% of senior executive jobs.
That said, the industry knows it has a problem, and many banks have diversity programs that actively recruit promising women and minorities.
Getting Started in Investment Banking
Investment bankers are deal-makers, and getting themselves hired is the first deal they have to pull off.
A college degree with a major in finance or economics from a prestigious school is practically a prerequisite. An MBA, an advanced degree in math, or a chartered financial analyst (CFA) certification can improve a candidate’s prospects.
Networking informally and formally is crucial. An internship at a top firm can help someone get onto the first rung on the ladder. It’s also key step for gaining experience.
Appearances count, too. Investment bankers mingle with tycoons, and they’re expected to blend in.
How Do You Get Into Investment Banking?
Several formal licensing tests from the Financial Industry Regulatory Authority (FINRA) are prerequisites, including the Series 9, the Series 63, and the Series 79.
As noted above, a business degree and an MBA are helpful as educational background.
Other skills don’t come with a degree. Investment bankers are persuasive and tenacious. They have the people skills to build a network, and the negotiating skills to get deals done.
How Much Do Investment Bankers Make?
What Are the Big 4 Investment Banks?
The big four are JPMorgan, Goldman Sachs, Citigroup, and Morgan Stanley. Some other global giants are treading on their heels, including Deutsche Bank, Barclays, Credit Suisse, and UBS.
There are at least 100 highly-regarded global investment banks. These are banks that provide a full range of financial services to companies and high-wealth individuals.
What Are the Types of Investment Banking?
Virtually all investment banks today provide a range of financial services. The types are defined more by scale or specialty than by function. A regional boutique bank might specialize in a particular area such as mergers and acquisitions. An elite boutique bank takes on only the biggest clients.
The bulge bracket banks include the Big Four plus all of their close rivals. They dominate the financial activities of the Fortune 500.
The Bottom Line
Investment bankers play a role in helping their clients raise capital to finance various activities and expand their businesses. They are financial advisory intermediaries who help companies and governments raise money for various uses.
While this activity keeps the wheels of capitalism turning, the investment banking industry has come under scrutiny, particularly because it plays a key role in so many elements of the process of raising money.