It’s been 11 years since the financial crisis of 2008, when top investment banks on Wall Street went into disarray. Lehman Brothers filed for bankruptcy and Bear Stearns was acquired by JPMorgan Chase & Co., and a generation of finance grads found themselves pining for work in their chosen field. But now it’s 2019, and strict Obama-era measures like the Dodd-Frank Wall Street Reform and Consumer Protection Act have kept an eye on Wall Street. The result? Top companies like Goldman Sachs are thriving as financial advisors for corporations and governments, even while some of the country’s most-promising millennials are pursuing careers in tech instead of finance.
Keep reading to find out what’s really going on in the investment banking world today and decide if you should “invest” in this career path.
- Investment Banking in a Nutshell
- What Do Investment Bankers Do?
- The Role of Investment Banks and Their Services
- What Are the Top Investment Banks?
- Prepare For Stress: Entering a Career in Investment Banking
- Investment Banking in 2019 and Beyond
Remember how academic advisors in college told you what classes you needed to take in order to graduate? That’s a similar kind of relationship investment bankers have with their clients, with potentially millions of dollars riding on following the advisors’ advice.
Investment bankers help companies, governments and other entities that need assistance with large, complicated financial transactions and advice on risk management for debt and equity securities, equity research, asset management, mergers and acquisitions, initial public offers — aka, “going public” — and stock placement, among other services. This might seem complicated because the industry is full of Harvard graduates, but it’s actually pretty straightforward.
“Investment banking is a method of controlling the flow of money,” Robert Johnson, Professor of Finance at Heider College of Business, Creighton University, said. “The goal of investment banking is channeling cash from investors looking for returns into the hands of entrepreneurs and business builders who are long on ideas, but short on cash. Investment bankers raise money from investors, by selling securities, and then transfer that money to people who need cash to start businesses, expand businesses, run cities or bring other costly projects to reality.”
Investment banks play a key role in American economics, especially in the corporate finance world, where they save their client companies and governments a lot of money. Say a hugely successful family-run dog food company is bursting at the seams with net revenue and wants to go public and make an IPO, which lets outside investors invest in the company by purchasing stock. The company might not know how to handle such a massive and potentially risky situation because its main focus has been on, well… dog food. No sweat! This is where an investment banker like Goldman Sachs swings in and helps out by making recommendations — on share prices, for example — based on their to-the-minute interpretation of the market.
Why would this family business trust a Wall Street investment banker? Because the company has a lot of potential for growth and employees who depend on the company’s success to keep their families happy and healthy.
Beyond IPO’s, investment bankers offer many more services:
Companies need money, and investment bankers help them gain it through the process of underwriting. Underwriting is the act of raising capital for a company by selling its stocks or bonds to investors. The three types of underwriting are:
- First Commitment: The investment bank buys all of a company’s stock and then resells it at a higher price. The underwriter assumes the risk — if the stock doesn’t sell, the investment bank is left holding the bag.
- Best Efforts: The investment bank agrees to sell as much of the company’s issue as it can, but it has no financial or legal liability in the event the stock doesn’t sell.
- All-or-None: The investment bank and the company agree that unless the whole issue of stock can be sold at a predetermined offering price, the deal is kaput and the underwriter is out of luck.
Mergers and Acquisitions
This is the process of combining two entities. It’s a vital service for investment bankers because it requires them to use their networks and relationships to target opportunities and negotiate for their client.
The investment bank can work on either the “buy” or “sell” side of the deal. The buying side wants to buy the other business for the lowest price possible, whereas the selling side wants to sell for the highest price possible.
There are multiple types of mergers:
- Horizontal Merger: A merger between competitors that sell the same product type, such as Coca-Cola and Pepsi.
- Vertical Merger: A merger between two companies that work within different parts of a product’s supply chain, such as Petco combining with that aforesaid dog food company.
- Congeneric Merger: A merger between two businesses that service the same base of consumers in differing ways, like a baby stroller and car seat company merging to dominate the “new parent” market.
- Market-Extension Merger: A merger between two companies that sell the same product but in different markets.
- Product-Extension Merger: A merger between two companies that sell related products within the same market.
- Conglomeration: A merger between two companies with no common areas of business.
Here are the steps involved in an M&A, as listed by the Corporate Finance Institute:
- Create an acquisition strategy.
- Define the acquisition criteria.
- Find a target.
- Plan the acquisition.
- Value and evaluate the target.
- Distribute a letter of intent from and negotiate on behalf of the buyer.
- Conduct due diligence to reveal risks.
- Seal the deal with a purchase and sales contract.
- Secure financing for the deal.
- Implement the transaction.
Sales and Trading
This is the part of investment banking that is full of smiles and handshakes, as well as cut-throat ambition. The sales and trading division of an investment bank assists with the buying and selling of equities like stocks, mutual funds, hedge funds and pension funds. This is all about the big money.
This is the division of investment banks that do the research on all securities in a transaction — in other words, provide the “coverage” that helps their clients make sound decisions.
This is the managing of investments for all clients and investors through a wide range of investing styles.
Competition is fierce among top-tier investment banks as they try to outpace one another with relationships, deals and offers.
The world’s largest global investment banks are known as the “bulge bracket,” a term that originated from the list of banks on a prospectus, which is a formal summary of a proposed project that is sent out to prospective investors. The banks are listed in order of the size of the role they played in the deal, with the major players listed in larger, bolder type that takes more space — hence the “bulge.”
Bulge-bracket institutions offer some of the most innovative and cutting-edge financial products. Not to mention, they are the primary dealers of U.S. Treasurys. Many of these investment banks own or are affiliated with consumer and commercial banks.
|The Top 25 Investment Banks
|Investment Bank||Revenue||Market Cap||Employees|
|JPMorgan Chase & Co.||$109.029 billion||373.91 billion||254,983|
|Bank of America Merrill Lynch||$91.9 billion||278.08 billion||209,000|
|Wells Fargo & Company||$86.4 billion||217.38 billion||262,800|
|Citigroup||$72.9 billion||156.52 billion||200,000|
|HSBC||$53.780 billion||155.36 billion||237,685|
|BNP Paribas SA||$46.812 billion||49.995 billion||202,624|
|Morgan Stanley||$$40.107 billion||73.12 billion||59,513|
|Goldman Sachs||$36.616 billion||77.89 billion||36,600|
|Credit Suisse Group AG||$34.275 billion||33.58 billion||46,360|
|Mizuho Financial||$34.202 billion||39.82 billion||254,983|
|Royal Bank of Canada||$32.289 billion||112.21 billion||84,087|
|Barclays||$28.212 billion||31.65 billion||83,500|
|Deutsche Bank||$27.882 billion||17.07 billion||90,866|
|UBS||$25.1 billion||44.39 billion||66,922|
|Bank of Montreal||$21.685 billion||46.20 billion||45,454|
|BlackRock||$14.198 billion||67.05 billion||160,000|
|Nomura Holdings, Inc.||$7.55 billion||15.70 billion||27,864|
|Mitsubishi UFJ Financial||$3.672 billion||64.129 billion||144,000|
|Jefferies LLC||$3.183 billion||6.04 billion||4,700|
|Lazard||$2.755 billion||5.00 billion||3,074|
|Evercore Inc.||2.083 billion||362.10 million||1,700|
|Houlihan Lokey||$963 million||3.08 billion||1,354|
|Moelis & Company||$885.8 million||2.09 billion||583|
|Piper Jaffray||$784.4 million||1.10 billion||1,262|
|China CITIC Bank||$293.779 million||35.41 billion||10,000+|
The Cream of the Crop
Here’s more in-depth coverage of some of the most prestigious investment banks:
1. JPMorgan Chase & Co.
This is a mastodon of financial institutions. Coming from a long history of M&As, the company currently has $2.6 trillion in assets. It’s made up of two parts: JPMorgan and Chase. JPMorgan covers the investment banking side whereas Chase is a business and commercial bank. The company as a whole employs over 250,000 people throughout 100 markets.
- Total Net Revenue: $109.03 billion for the 2018 fiscal year
- Known Services: Investment banking, including financial advisory, capital raising and risk management; consumer and community banking; commercial banking; financial transaction processing; asset and wealth management
- Earnings per Share: $9 in 2018
2. Goldman Sachs
Goldman Sachs is a household name, and as its 150th birthday approaches, it’s stronger than ever. Even though Goldman Sachs had a role in the financial crisis of 2007-08, it’s one of the most prestigious investment banks out there with just under $932 billion in assets as of 2018.
Anyone interested in becoming a U.S. Treasury secretary or White House advisor would be well advised to consider starting out at Goldman Sachs. The history and connections run deep here.
- Total Net Revenue: $36.62 billion for the 2018 fiscal year
- Known Services: Financial advisory and underwriting; institutional investor services; investment management; lending and investing portfolios; online consumer banking through Marcus
- Earnings per Share: $25.27 in 2018
3. Morgan Stanley
This company has assets of over $853 billion and employs nearly 60,000 people worldwide. Morgan Stanley opened its doors on Wall Street in 1935 and handled $1.1 billion in public offerings and placement that year. Service to communities is one of the company’s major global commitments, with 1.67 million service hours volunteered by its employees. Although Morgan Stanley was a recipient of government funds from the Troubled Asset Relief Program, the firm has turned things around.
- Total Net Revenue: $40.11 billion for 2018
- Known Services: M&As, capital raising, IPOs, wealth management and brokerage services
- Earnings per Share: $4.73 in 2018
4. Bank of America Corporation
In 2008, the investment bank company Merrill Lynch was acquired by Bank of America. It operates in nearly 40 countries with major centers in Hong Kong, London and New York. Bank of America has total assets of $2.4 trillion, making it the second-largest U.S. bank.
- Total Net Revenue: $91.9 billion for 2018
- Known Services: M&As, lending, trading, risk management, debt and equity offerings
- Earnings per Share: $2.61 in 2018
Citigroup has come a long way since it was founded over 200 years ago as the City Bank of New York. Today, Citi’s focus on facilitating growth and economic progress has morphed it into one of the world’s most prestigious financial institutions. With nearly $2 trillion in assets, it’s also one of the largest.
- Total Net Income: $72.9 billion for 2018
- Known Services: Asset protection, lending, payment processing, capital markets
- Earnings per Share: $6.69 in 2018
Ultimately, investment banks carry out similar services. It’s the investment-banker-to-client relationship that carries a lot of weight. This makes finding the right investment banker tough, but it makes being an investment banker even more challenging.
Investment banking is a good fit for someone who loves building relationships with clients, meeting fast deadlines, burning the midnight oil and earning a substantial salary.
Hours and Pay
Get ready to work an average of 70 hours or more per week when starting off as junior investment banker. The good news is you can make $98,000 plus bonuses in your first year, and a managing director could take home $230,000.
What Do I Need To Know About Working as an Investment Banker?
Make no mistake, this career requires constant energy and focus.
“For those seeking to work as investment banking professionals, having a client-oriented focus is paramount,” noted Ben Harrison, founder of the private capital market software company Deal Cloud. “M&A advisors and bankers are trusted to represent sellers and buyers throughout the transaction process, which can take months or years, so it’s critical that they have a fundamental knowledge of the end markets and operating models of the companies they serve. They also need pipeline management and due diligence tools and technologies that will keep them organized and on deadline. In pursuit of the most ideal client outcomes, these professionals must be strong relationship managers, skilled financial engineers and trusted advisors all at once.”
Carlos Abadi, managing director of Decision Boundaries and a 30-year investment banking veteran, offers this advice to young people considering a career in this field:
1. “Do it only if you love (and are good at) finance. Post-Great Recession, the sky is not the limit in terms of compensation any longer.”
2. “Consider working for an independent firm only if both you and the firm itself have an innovation edge. It is very rewarding to beat the bulge-bracket firms but it’s only going to happen if you have something significantly better to offer the client. Remember that the household-name firms are safe choices and that no corporate CFO is going to lose their job for hiring one of them.”
3. “Even if you choose to work for a bulge-bracket or bank-affiliated firm, keep in mind that you are going to be working in a contracting industry in terms of headcount. Here, the pace of technological innovation will hit from two different directions. First, larger investment banks are increasingly relying on technology which can produce anything from a deal closing schedule to an AI-enabled credit analysis. Secondly, the unregulated fintech insurgents, although not yet meaningful in the investment banking field, are certain to start nibbling at the incumbents’ market share with a compelling value proposition or, at least, cap their (already lackluster) growth opportunities.”
Sound like a dream career? If so, the next step is to get a competitive education.
The Best Degree To Become an Investment Banker
A viable candidate for any bulge-bracket investment bank should have a finance or business degree and an MBA. Although many of the best schools tend to be in and around New York and London, you have plenty of options.
EFinancialCareers reviewed its resume database to determine what percentage of MBAs landed in what it calls “front office” jobs such as M&A, capital markets, sales and trading and equity research. The study weighted the most prestigious investment banks — JPMorgan, Goldman Sachs, Citi, Morgan Stanley and Bank of America — most heavily and adjusted results to account for differences in enrollment between small and large schools. Here are the rankings:
- The Wharton School of the University of Pennsylvania
- The Leonard N. Stern School of Business at New York University
- The Columbia Business School at Columbia University
- London Business School
- The Booth School of Business at the University of Chicago
- The Business School at Harvard University
- HEC Paris
- The Graduate School of Business at Stanford University
- The Tepper School of Business at Carnegie Mellon
- The Tuck School of Business at Dartmouth College
- The Samuel Curtis Johnson Graduate School of Management at Cornell University
- Saïd Business School, University of Oxford
- Cambridge Judge Business School, University of Cambridge
- The Kellogg School of Management at Northwestern University
- The School of Management at Yale University
- IESE Business School, University of Navarra
- The Darden School of Business at the University of Virginia
- The Haas School of Business at the University of California-Berkeley
- The Fuqua School of Business at Duke University
- Imperial College Business School
These competitive schools have close ties to the top investment banks, so landing an interview at a bulge-bracket firm could be as easy as schmoozing at an alumni mixer.
As with every industry, schools have to update and adapt to the growing technological advances. For investment bankers, the evolution of automation has changed the industry and the day-to-day requirements for investment bankers.
The Evolution of Automation and Technology in Investment Banking
Because the job of an investment banker requires so many interpersonal skills and keen judgement, it is hard to imagine this career being replaced by a machine. That said, the investment banking industry has seen automation slowly take over. In the words of Saijel Kishan, Hugh Son and Mira Rojanasakul, writing for Bloomberg Businessweek: “Traders, prepare to adapt.”
Front office jobs like research analyst, money manager and trader are all vulnerable to disruption at the hands of automation. For example, in 2011, Morgan Stanley created an app designed to share real-time information with investors And Goldman Sachs automated some of the routine tasks associated with preparing for IPOs. With deal databases and algorithms that match buyers and sellers, the investment banking technological revolution is in full swing. Perhaps this is why the industry sees more promising minds jumping over to tech companies instead of banking.
As vital as investment banking is to the world economy, it is not without major complications. Financial scandals and a societal distrust in the “too big to fail” banks have spurred strict government regulations and a dropping interest in finance careers. Yet, institutions like Goldman Sachs and JPMorgan Chase still have the pulse and authority over much of the global market. Whether for a company’s financial investments, career opportunities or personal banking, investment banks offer the most precise and competitive services and have shown they can handle even the most turbulent of times.
Keep reading to find out how these banks are quietly running the American economy.
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Jared Nigro is a writer based in Los Angeles who has worked for many socioeconomic and environmental foundations like the Dan & Susan Gottlieb Foundation as well as Inside Out Writers.
Last updated: Sept. 25, 2019
Editorial Note: This content is not provided or commissioned by the bank advertiser. Opinions expressed here are author’s alone, not those of the bank advertiser, and have not been reviewed, approved or otherwise endorsed by the bank advertiser. This site may be compensated through the bank advertiser Affiliate Program.