What Do Investment Bankers Do? A Detailed Guide

Avadhut |
July 24, 2020

Ever wondered what do investment bankers do?

Here is an article that explains in a simplified manner all that you need to know about the operations of bulge bracket investment banks (Like Goldman Sachs and Morgan Stanley) and the roles and working schedules of investment bankers.

What Is an Investment Bank?

“ An investment bank is a financial institution that offers a range of services from financial advisory, underwriting, trading, research, raising capital, issuance of shares and bonds, to advisory on mergers and acquisitions. They are usually involved where large amount of money moving happens. “

Typically the clients of investment banks are large business corporations, but sometimes high net worth individuals (HNIs) may also take these services.

Please do not get confused when you read the term ‘banking’, as investment banking business is very different from traditional and commercial banking in terms of their core operations.

However, there are a plethora of traditional and commercial banks that offer investment banking services but not vice versa.

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What Do Investment Bankers Do?

 

Let's see the job description of these Investment Bankers.

To understand what do investment bankers do, let’s take an example.

Let’s presume that a particular company, called Company X, needs to get more money. They need it to build a production facility or a factory, in laymen’s terms, or they have to hire more employees.

One way the company can get a hold of more money is by issuing bonds or stocks.

 

As investment bankers put it themselves, to issue bonds or stocks means actually borrowing money from some strangers. Of course, the process is a lot more complicated than that, so this is where you, the investment banker, come in.

You need to convince people to invest in Company X by buying those stocks and bonds.

Therefore, through you, Company X relinquishes the rights to parts of itself in exchange for money.

This agreement is legally formatted by said stocks or bonds.

The relationship between Company X and its investors, as well as the legal procedures, the paperwork, and the consultancy, all fall into your care.

At this moment, you need to take some time out and think if this is the right path for you. Do you have what it takes to be the person handling this kind of responsibility and money? If so, read on, because we have some excellent advice for you to get to that point.

Another question you might be asking yourself at this stage is why would Company X and its investors need you to handle the transactions.

Simply enough, because you’re lucky and because most companies don’t actually know how to trade.

They need an advisor, or a middleman if you will to do it for them. And, seeing as this is such an outstanding job for them, they are willing to pay you huge amounts of money to do it.

Continuing the process, once you, the investment banker has decided and settled upon the investors, you need to perform ‘due diligence.’ Lightly put, you have to ensure that Company X’s accountants say that its financial situation is exactly what they say it is.

They will write what’s called a ‘prospectus’ for you in which they will explain exactly what are the risks and profits of buying the stocks or bonds in question.

 

The last step of the process you, the investment banker, needs to do is to take this prospectus up to the Sales and Trading departments within the bank you’re working for.

These colleagues of yours are the ones who get to go out and convince companies, mutual funds, hedge funds, rich and less rich people to buy all those stocks and bonds so that you can make as much money as you can for Company X.

What do you do during all these procedures? You get to relax, prod them along, make sure they do their job, and they don’t take a lot of time doing it. Also, you hope for the best.

One piece of advice here, from investment bankers all over – never worry about the prospectus. Nobody reads it.

This is the simplified, light, and nice version of the answer to the question ‘what do investment bankers do?’ Evidently, all the steps of the process are highly complicated and require a lot of work and knowledge on your part. Building on this statement, let’s take a look at what you actually need to do to become an investment banker.

All the activities of an investment banker can be divided into 4 broad categories:

1. Data management

Investment bankers always have to deal with a lot of numbers and a large set of data points.

The nature of work demands an investment manager be good in number crunching.

It includes collecting data from various sources and storing them in a systematic manner for future reference.

This data can be collected from multiple sources like annual reports, balance sheets, analyst reports, books of records and reported company financials.

2. Financial analysis

It is one of the primary responsibilities of investment bankers to make those numbers talk.

In other words, there is a lot of financial analysis and valuation required for deriving conclusions and insights from the collected data.

They use a variety of financial models and tools in their day to day operations.

This is the most time-consuming task for investment bankers.

3. Liaisoning

Investment bankers, individually or in a team, need to act as a middleman and coordinate with the clients and the external entities involved.

This activity is particularly true in profiles of mergers & acquisitions and raising funds like Initial Public Offering (IPO) for the clients.

It involves a lot of communication, both oral and written, between the parties involved. These bankers actually work with different industry groups and also with hedge funds.

4. Client management

This is one of the most important responsibilities of an investment banker, especially at a senior position in the organization.

It involves creating reports, presentations and client interface. Real Estate and Wealth Management businesses come under this.

Since investment banks work for clients across the globe, investment bankers need to travel a lot to service their clients.

Why Do Investment Bankers Need to Work Long Hours?

1. Work-based on client needs

Since the nature of the work is such, that investment managers need to work around the client’s schedule and requests, long working hours are a commonplace sight in investment banks.

To serve the clients for urgent and immediate requests, investment bankers are known for burning the midnight oil.

Also, since a lot of work revolves around the capital markets, the actual work of an investment banker typically starts after the stock markets are closed, and that’s why finishing a day’s work requires staying back in the office till late hours of the day.

2. Precision and accuracy

Wherever there is a lot of data involved in the working operations, precision and accuracy are of utmost importance.

Investment managers need to be extra careful about the accuracy of the data they work with because even a decimal shift can change the landscape of your analysis.

Thus perfecting the work and making sure that there are absolutely no mistakes in all that number-crunching take up loads of time.

3. Very less delegation of work

The kind of services that investment banks offer to their clients, requires a good amount of time and effort to be spent on getting to put everything in place before the real work starts.

It becomes imperative to make a single person responsible and accountable for major tasks to avoid confusion and element of error, which ultimately leads to long working hours for an investment banker (It does not mean that investment bankers do not work in a team, they do, but they have clearly separated and well-defined roles and responsibilities).

How Do Investment Banks on Wall Street Make Money?

Up till now, you have understood what and how do investment bankers work.

Now, let me tell you how they make money in the process. Again the revenues of an investment bank can be bucketed into three broad categories:

1. Charging consulting fee

Most of an investment bank’s revenues come as a pre-decided and fixed amount that they charge to the client. The costing is usually done by two methods:

a. Effort based:

During the initial discussion and scope definition, investment banks would present the estimated efforts that they would put in for a particular project.

They usually charge a fixed rate per day or a per hour basis for the total duration of the project.

b. Value-based:

In this method, the investment banks would charge the client a certain percentage of the value of money involved in a project.

This method is most commonly used in a lot of mergers and acquisitions and issuance of bonds and shares in the stock market.

2. Interest on funds raised

One of the services that investment banks provide is raising funds for their clients.

This money can either be raised from an external party or from within the investment banks.

For the first case, they would charge a certain percentage as a fee to help them raise that fund.

In the second case, they would earn interest on the loan provided to the client.

Typically, this is a recurring income till the time the loan is completely paid by the client, but in a few cases, it can also be bulk payment at the beginning of the loan issuance.

3. Commission

This is particularly true in case an investment bank provides trading services to the client.

They would charge a certain percentage on all transactions that they do on the client’s behalf.

There are usually slabs of different percentages depending on the value of a transaction. This again is a recurring income for investment banks.

How to become an investment banker

When it comes to acting upon this matter, there is a trifecta of factors you need to do. Not take into consideration, but do.

The trifecta is academia-internship-work. Here is a detailed look at these steps and all the actions you need to take.

Let's see the investment banking career path.

Academia

While you will find quite a few testimonials online from people saying they made it into the business with college degrees that are not field related, do not rely on them.

They are true, indeed, but these are exceptions that happen so seldom it’s not a good idea to bank on them, pun intended. You will see why when you understand the underbelly of investment banking. It all starts with the way people get hired in investment banks.

The demand for an IB job is so high, that there are some 10 applicants per job at every bank out there, no matter how big or small. This is what renders job advertising moot for banks.

They don’t even bother to parade their openings on the market, as they know people will come to them. And people do. However, since the jobs are not advertised out in the open, i.e. in newspapers or online, only the ones in the field know about them. This brings us back to college degrees.

If you’re not in the field, it’s almost sure you won’t even hear about an opening, especially if it’s at a huge bank, such as Goldman Sachs or JP Morgan.

Second of all, investment banks are known to choose their future employees from Ivy League field related colleges. The professors there usually act as mentors and turn into a veritable link between the banks and the students.

Thirdly, academia matters not only for job networking but for the education itself.

Banks hire people who have a working knowledge of their business, even if they have no experience. You will receive training, but you need to have the basics first.

Therefore, taking the above into consideration, what do you need to do regarding academia?

  • Study as hard as you can in high-school
  • Do not back down from subjects such as economics, calculus, and math
  • Pass your SATs with as high a score as you can, because your degrees in high school will help you get into an Ivy League college
  • Get accepted into an Ivy League College
  • Graduate top of your class, because this is the only way scouts and banks will notice you and want to hire you.
  • Learn Financial Modeling by joining online or classroom courses
  • Do as much networking as you can during your education years. Make yourself known from an early age, by participating in training and conferences.

Internships

This particular step is pretty straightforward. After you graduate from college, you absolutely must sign up for an internship. It’s the best and safest way to get into the world of investment banking, learn the secrets of the trade, get as good as you can, earn money, and, last but not least, make yourself know and coveted.

Here are the best IB internships for 2019, which you need to apply to now.

  • The Houlihan Lokey Internship, which ranks 9.680
  • The Evercore Advisory Summer Analyst and Summer Associate Program – 9.677
  • The Centerview Partners Summer Analyst – NYC – 9.371
  • The Perella Weinberg Partners Advisory Summer Internship Program – 9.293
  • The William Blair Investment Banking Summer Analyst Internship – 9.255
  • The RBC Capital Markets Summer Analyst/Associate Program – 8.781
  • The UBS Summer Internship Program – 8.734
  • The Goldman Sachs Global Summer Internship – 8.540
  • The J.P. Morgan Corporate, Asset Management, and Corporate & Investment Bank Programs – 8.522
  • The Nomura Investment Banking Summer Internship Program – 7.880

 

Work

Any investment banker out there, when asked ‘what does an investment banker do’ will tell you this – work. They will also inform you that they can’t possibly stress enough how important this is. As explained above, being an investment banker is not your ordinary 9 to 5 job. Far from that, it’s a job that will take over most of your life, with bountiful remunerations, awards, and personal gains. You will need to do the following.

  • Network – this is one actionable verb you will need to imprint in your memory. Nothing helps an investment banker more than networking. The more people you meet and establish professional or even friendly relationships with, the better your chances are at doing your job greatly. Don’t forget that your job as an IB is to sell stocks and bonds to companies and funds. These, in the end, mean people. Win them over to your side and half your work is already done.
  • Put in all the hours you can spare – 8 hours a day is not nearly enough when you’re an IB. Get up early in the morning, go to the office, and leave late at night. Why? Because ‘money never sleeps’, remember, so why should you?
  • Participate – in absolutely anything you can and that is field-related. Training, internships, meetings, calls, actions organized by your company and so on. Be present and aware of everything that is happening. Let people know you’re on top of things and that you’re here to stay.
  • Never stop learning – the financial market is a living organism. Treat it as such. Understand that what you’re dealing with are not numbers and figures in an Excel spreadsheet. They’re changeable entities that you must control.
  • Cultivate your professional personality – given the fact that you need to work with people, your personality and people skills are crucial to the job. There is no room for shy people in investment banking. Put your foot in the door and a smile on your face. Develop your communication abilities, as well as your selling skills. Be charming, dapper, poised, and elegant. Via your behavior, show people they can trust you because they are putting all their money in your hands, after all.

 

  • Cultivate yourself – believe it or not, the most successful bankers are the ones who have hobbies and interests you would never have thought about. They play in a band, go to wine tastings, are skilled in cooking, do surf-kiting, hike, and climb mountains like they were born to do it. Not only are they successful at what they do, but they also get picked by their respective banks to handle the biggest accounts.
  • The reason is the same. You have to deal with people in this job. Not any type of people, but rich ones. Chances are they will be interested in the very same things we listed above. If you relate to them at a personal level regarding these interests and hobbies, your account is in the bank, so to say.

Conclusion

This article gives you clarity on topics like how investment banks actually work, what is an investment bank, what do investment bankers do, why do investment bankers need to work long hours, and how do investment banks make money.

If you have any questions please feel free to write back.

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