Investment Banking is an incredibly broad and multidimensional sector, which is quite often misunderstood. Ranging from boutique subject matter experts to multi-national, full-service conglomerates, there are around 3,000 Investment Banks operating globally today. The term Investment Bank is commonly used to define a financial firm which assists in the raising of capital in the form of debt (bonds) and/or equity (stocks). The term is used so frequently that its meaning often carries misconceptions. Many financial institutions are involved in investment banking to some extent; however, most have both investment banking functions as well as a sales & trading functions. Many employees within an investment bank report into the Sales & Trading division, where they can serve, for example, as Brokers or Traders. These employees should not be considered ‘Investment Bankers’ even as they are working for an investment bank. Simply put, an investment bank is a financial institution that raises capital, trades securities, insures bonds, and manages corporate mergers and acquisitions in exchange for fees and commissions. Financial institutions who partake in these activities employ licensed advisers who will manage and provide advice on these transactions.

An investment bank’s clients can be either public or private corporations. Because Investment Banking is a global industry, firms compete to be at the forefront in their product offerings, assets, and technology. Once a product is known to create large margins and draw in clients, it is normal for other banks to mimic these products in attempt to retain a competitive edge. All financial institutions, including investment banks, seek to maximize their profitability by managing their level of risk; and for the most part, the larger the risk, the larger the potential reward. The main functions of an investment bank are to raise funds within capital markets and advise their clients on financial transactions, most commonly mergers and acquisitions. Most investment banks will also provide additional financial services for their clients, including the trading of fixed income, foreign exchange, commodities, and equity securities. Sales & Trading functions are discussed in much greater detail in the Sector Analysis section Institutional Securities, Trading. Financial advisory is a service of Investment Banks where they will basically provide direction and guidance to their clients in strategic alternatives and the implications these decisions might make on their finances. They will often serve as consultants who will give and sell advice to the companies they represent.

The most common area in which clients seek financial advisory is for M & A’s (mergers and acquisitions). In this case, the Investment Bank will advise clients on which companies they should purchase and on which companies might want to sell. An investment bank will also commonly manage the merger and/or acquisition transaction process.

Capital Raising is a service which Investment Banks provide in the capital markets acting as an intermediary between one party who needs capital and another party which already has capital and would like to invest it ¹. Often times, this capital is raised in the form of debt (bonds) and/or equity (stocks) ⁴. Capital-raising is multi-faceted and time consuming. Most companies do not have the knowledge or resources to raise significant capital without an investment bank’s help. Investment bankers often create what they call ‘pitches’ which are ideas they have prepared to present to their clients or potential clients. Ideally, these pitches are designed in an effort to reward the banker with a mandate when the client decides they are ready to make a project financing ⁶. A mandate is the formal appointment made by the client with the bank which allows that institution to advise on or arrange a transaction. Once this happens, the investment bank will provide any required materials necessary to facilitate the transaction of the deal ⁶. Once a client is matched up with the investment bank, the banker will determine the characteristics of the security, the type of security (debt, equity, etc.), the amount of money that will be needed, and the structure (price of the stock, the interest rate, maturity rate etc.) ⁴. Most of the time, the security would be ready at this point to be sold to the public, but in some cases it is sold to one or more private investors.

When there is a public offering (IPO), an investment bank will often purchase the securities from their client prior to the offering and then resell them to another party (the public) at a higher price. The firm then makes a margin on top of any fees associated with their services. Typical fees for investment banking are between 3% and 10% of the total capital raised, but they can vary drastically depending on the type of capital raised. Naturally, the larger the sum of capital raised, the larger the fees become. Most times, banks will require a portion of the fee upfront or paid as a retainer and also collect additional cash once the deal is closed. There are two ways an offering like this can be structured. The first is when the bank tries to sell as much of the security as they can, but will only be responsible for buying as much from their clients as they are able to sell to investors. Another way would be for the investment bank to make a commitment to their client where they would buy a specific amount of the security and try to sell this whole amount to the marketplace.

A distinction should be made between Investment Banking and Commercial/Retail Banking (See Commercial/Retail Banking for a more detailed sector analysis). Commercial/Retail Banks are institutions which make loans and accept deposits from clients. Commercial/Retail Banking is a low margin, high transaction business whereas Investment Banking is a high margin business with a relatively low volume of transactions or “deals.” Although some Commercial/Retail Banks provide investment banking services, these functions are separated and were once heavily regulated by the Glass-Steagall Act created in 1932 which prohibited banks from both underwriting securities and accepting deposits. As of 1999, the Gramm-Leach-Bliley act re-legalized the ability for a single institution to perform both commercial banking and investment banking functions. However, whereas these functions can now exist within a single institution they are still regulated in how they are able to overlap and are quite distinct.

CAREER PATH & CORPORATE STRUCTURE 

Though every financial company has a unique structure and hierarchy using different characteristics and requirements to define each level, there are some similarities to allow a general pattern to be discussed. One consideration to make when looking into an organizational structure is the size of the bank. Investment banking divisions employ a total estimate of 40,000 people, more than three quarters of which are males.

When considering working for a large or small investment bank many people will prefer one strongly over the other, although they both have their advantages and disadvantages. Smaller companies will give employees a large amount of exposure to more senior managers and executives of a company ¹. Working with people at such a level lends some clarity to the other roles in the company and teaches an employee a bit more depth into their domain by providing a role model, not to mention some excellent opportunities to network with others. Employees working for a smaller investment bank often report more transactional experiences at lower levels, more responsibility at every level, and a wider exposure to the business and the multifaceted function of the entire company than does a larger investment bank.

With such advantages, it is easy to question why some may prefer working with larger financial companies? First of all, many employees like to work for a company whose name is widely recognized and prefer that they are associated with a big ‘blue chip' company. One reason larger companies can be more attractive to prospective employees is that they tend to have more organized and developed, training and structure ¹ . With such policies in place, a company can shed some light into which actions they find favorable versus unfavorable, and provide more structured benefits and expectations ¹. The potentiality of more room for upward mobility, and having a developed process of on-boarding new employees and bringing them up to speed with the existing employees ¹, is another attractive quality. This can also reduce the amount of animosity between individual employees, races, or genders, sometimes thought to be infused into corporate situations. In a large company, there is also a larger amount of mobility, or ability to move within a company across departments (whereas, as mentioned before, in smaller companies it is easier to climb higher up in the organizational structure than it is to cross over functions and groups).

MBA graduates will begin working as an Associate at an investment bank where they tend to focus on financial analysis and on bringing in new business¹. Many times, students will work as Interns or Summer Associates for financial companies while in school to gain experience. Starting as an Intern or an Analyst is the single best way to gain entrance points into a full-time position ² and they receive a high level of supervision and direction from more experienced bankers¹⁰. Generally, Analysts do anything necessary to help more Senior Bankers work effectively and maintain clientele. These employees will often work on a computer to model outcomes of different paths and scenarios possible for that client. These models are normally created based on the company's historical data and valuations. These models can span over just a few days or they can be designed to show the impacts of a trade for the following five years. Analysts may also be responsible for assisting Senior Associates on presentations and travel arrangements.

The next step after ‘Analyst' is usually ‘Associate' and is common after about three years of service as an intern or analyst for those who have just received an MBA ¹⁰. The responsibilities of analysts and associates are often very similar, but Associates are given slightly more challenging tasks, greater responsibility, and more promotional opportunities. These professionals will supervise the analysis done by the more junior analysts and interns as well as develop the financial plans to be later implemented by more senior associates ¹⁰. Once an associate is a bit more senior, they will be given an opportunity to do more creative and challenging work alongside more senior employees to develop strategies and partake in more extensive strategic and financial planning.

ORGANIZATIONAL STRUCTURE

The financial services industry has seen significant deregulation and consolidation over the past decade. This has allowed financial firms to work in more sectors, offering services in virtually every corner of the industry. Investment Banks are often categorized in one of the two ways - Boutique Investment Banks and 'Full-Service" Investment Banks. A 'full-service' investment bank, means that they have involvement and services in all sales and trading functions. On the contrary, boutique banks will often specialize in one major financial area (ie. Commodities Trading) and serve as a subject expert in their area. Large financial companies and investment banks typically have several business units separated by function and/or industry the group serves ¹, specializing in one or more, it has come to a point where many banks try to offer every possible service to their clients.

Many groups are characterized in accordance to their function (ie. Mergers and Acquisitions) and provide services across financial industries. In groups organized according to industry (ie. Media), there is not normally any crossover within different industries ¹. Most financial groups however, have heavy interaction with others while carrying out any transactions that take place, so there are not any large boundaries between them. Though the organization can vary greatly between banks, some typical groups in larger Investment Banks include: Global Securities, Fixed Income, Equity Trading, Asset Management, Sales, Investment Research, Private Wealth Management, Corporate and Municipal Finance, Leveraged Finance, Principle Investment.

A common arrangement of units can be categorized as a function of the front office, middle office, or back office depending on which activities that particular unit participates in. Many employees have interest in working in a front office in order to be the face of a company and be a part of the main revenue production with large financial rewards. Each segment, however, has a unique function which is crucial to the business and are described in greater detail below.

FRONT OFFICE

The front office is split into three main categories: Investment Banking, Investment Management and Financial Markets. Investment banking refers to the traditional aspect of investment banking where the bank will help their clients raise money and provide advisory services ⁶. Some examples of investment banking include subscribing investors to a security issuance, coordinating with bidders, or negotiating with companies for targeting mergers ².

In an Investment Management division, many securities and other assets are managed to ensure they meet the investment goals, benefiting those who invest in them. This includes Private Wealth Management and Private Client Services. Some examples of these managed securities are shares, bonds, or other assets such as real estate ². Those who invest in these securities can be corporations or private investors ².

Financial Markets are known as an umbrella term which can be even further categorized by divisions in sales and trading, structuring, and research. Sales & Trading is normally the most lucrative area of a bank because the traders will buy and sell the bank's financial products for a profit, bringing in commissions. This department will also keep their clients informed about activities in the market and new trading ideas in an attempt to gain more business and tailor their solutions to their clients ^6,1,3.

Also a unit of financial markets, there is normally a research division where the employees will collect information about the market and their perspective clients to create reports on them. These reports will give some indication of what the researcher's recommendation and rating are for that company in terms of their financial situation and ability to buy or sell financial products ⁶. This research division, though crucial in assisting traders on appropriate actions to take, is subject to many regulations.

One well known barrier in the Investment Banking field is known as 'The Chinese Wall', a term which has been used since 1929 when the stock market crashed and the government wanted to limit the company's ability to engage in both businesses and dissipate any conflicts of interest. 'The Chinese Wall' is essentially an information barrier set up in a company in an attempt to separate those who make investment decisions from those who have access to highly confidential or non-disclosed information, potentially impacting these decisions. This is done in an effort to avoid a large conflict of interest and to safeguard a firm's insider information to ensure that the trading which occurs is proper ^2,7. 

Finally, the structuring divisions consist of highly analytical employees who create complex product offerings for their clients, normally resulting in larger commissions and returns. As the demand for derivatives products has been growing increasingly many structured divisions have been growing and hiring professionals with highly numerical degrees and backgrounds ².

MIDDLE OFFICE

The middle office, as it's name suggests, is an area that straddles the front and back office functions in the sense that it analyzes the trader's activity while considering the impact these transactions might make on the bank, as a whole. Often times, functions in the middle office include ‘risk management' or ‘operational risk.' For example, employees working in these functional areas are involved in setting limits on the size of the trades to ensure greater financial stability for the firm.

These employees will work with the balance sheet directly and attempt to prevent ‘bad trades' from occurring ². This section must also take economic risks into consideration while checking their accuracy and ensuring that they are considered in a timely fashion ². There is also an area of the bank, known as risk monitoring, that is responsible for the bank's capital management, tracking and analyzing of the capital which is flowing in and out of the company. These people will often interact with senior management to ensure that the risk exposure is controlled, as opposed to calculating and limiting the trades ³.

BACK OFFICE

The back office refers to the technology and the operations in an investment bank. Though there are some technical professionals in front-office roles, many reside in the back office where technologists will develop, implement, and maintain proprietary software for that company. In operations areas, employees will go over the trades which have taken place and ensure each is documented properly and handled appropriately. Because this area does not directly produce revenue, the compensation is not normally as high for these employees and some consider the work to be monotonous ⁶. Also sitting in the back office, is the group in charge of the bank's compliance. This area is responsible for understanding and implementing government and internal regulations, and ensuring that they are being followed ².

STRATEGIES IN INVESTMENT BANKING

Because investment banks are always coming up with new ideas and products, the strategies they use to operate have a tremendous impact on their ability to be profitable and remain competitive in the marketplace.

Strategists play an important role in investment banking by utilizing quantitative models in considering companies and industries, they try to analyze or predict their needs and performance while taking into consideration the macroeconomic climate². Strategists are in the front office of the investment bank and they have a large impact on the direction of the trading they do and the products the structure team will create.

When there is a public offering, the bank will purchase the securities from their client and resell them to another party at a higher price to make a margin on top of any fees associated with their services. There are two ways an offering like this can be structured. The first is when the bank tries to sell as much of the security they can, but will only be responsible for buying as much from their clients as they are able to sell to the investors. Another way would be for the investment bank to make a commitment to their client in which they would buy a specific amount of the security and try to sell the whole amount to the marketplace¹.