I'm sure most of us have heard the term, and maybe even assumed we knew the meaning, but when you really think about it, what do investment bankers do? There are many facets to the investment banker's job, and they have many roles within the financial industry. In this article, we will take a comprehensive look at the services provided by an investment banker, as well as what a career in investment banking might look like.
An investment banker isn't the typical banker you meet at a local bank that opens your checking account or extends you a car note. These are retail bankers, and while they serve a very important financial purpose, this is not the role of an investment banker. These bankers specialize in corporations. Specifically, they guide and advise businesses through three key areas: securing funds within capital markets, navigating their commercial clients through mergers and acquisitions, and giving sound and profitable financial advice throughout the life cycle of a corporation.
Securing Funds Within Capital Markets
When a corporation needs to raise additional funds to expand or take on a new project, they will typically turn to an investment banker. When asking what do investment bankers do, one of their primary responsibilities is to facilitate capital funding for corporate clients. This can be accomplished in several ways, and clients rely on the expertise of the investment banker to navigate them through this complicated process. The following are specific services provided by an investment banker to those seeking capital (or money to invest in their business).
Investment bankers perform the underwriting for the new project. Basically, this is a well-researched analysis of their corporate client and includes profit potential, risks, and details on why they need the additional capital. They write this report to give to potential investors. The aim is to procure as many investors as possible before the actual stock (equity in the company) or bond (company debt) is released for sale.
Once the investment banker has commitments from buyers of the stocks or bonds, they will issue them. This includes setting the value. For stocks, one of the most crucial jobs of the investment banker is to set the right stock price. The goal is to set a price that will optimize the number of stocks sold and the amount of funds received for future investments by their client. They also want to secure the highest number of investors possible.
If the client is buying funds through debt, the investment banker must choose the right interest rate to charge on that debt. This is crucial for ensuring the client does not pay more interest on the loan than necessary, and it has to be high enough to incentivize potential investors.
If the stock offering is for an IPO (initial public offering), the investment banker must create the prospectus for the stock. This explains the terms of the stock and provides all legal necessities for compliance with all appropriate regulatory agencies. An example of this would be the United States Securities and Exchange Commission or (SEC).
When asking, what do investment bankers do, another important aspect of this position is facilitating mergers and acquisitions for their corporate clients. They are a necessity for corporations who are planning to sell their business and businesses looking to expand by purchasing other companies. The following is a list of ways an investment banker will ensure your merger or acquisition is successful.
If a corporation is seeking to purchase another company, the investment banker will perform a comprehensive analysis of that company to determine an appropriate sales price. This ensures their client isn't paying too much for the asset. These reports usually include a detailed market analysis, underwriting and analysis of the company they wish to purchase, and a full evaluation of the company's potential risks.
Pinpointing a fair market price for the company is the first step. The investment banker will also determine the most favorable way to structure the acquisition. This is basically the overall framework of the sale. Any sale of a corporation could consist of an all-cash offer, stock options, immediate and long-term deliverables, and many other complicated details and terms. There are many facets that must be included when constructing a sales agreement, and it's vital you have a knowledgeable banker on your side.
It is wise for the buyer and the seller in an acquisition to seek the services of an investment banker when agreeing to buy or sell a company. It is important to have the expertise of these bankers to make sure you get the best terms for your transaction.
General Financial Advisors
Ideally, an investment banker's goal is to become their corporate client's one-stop-shop for their financial advisor needs. It isn't every day that a corporation needs funds for expansion or is looking to buy or sell a business. There are day-to-day investment decisions where using an investment banker is beneficial. The following are just a few of the many other hats a good investment banker will wear for their clients.
Once the merger/acquisition is complete, there will still be loose ends to tie. The investment banker will be there for the long haul way after the deal is closed to help their client through the aftermath of joining two organizations.
Many investment bankers offer both accounting and tax advice and services to their clients. No matter what business you are in, taxes affect your every move. It's important to have someone knowledgeable of the tax code looking over your shoulder. Any expansion or acquisition will have tax ramifications that need to be addressed, and an investment banker can help corporations through this process.
Like individuals, companies have funds that they would like to invest. Investment bankers can help corporations find the best opportunities for their extra cash to ensure they receive optimal returns.
Investment bankers can also help with strategic planning. They can advise customers on a potential purchase or sale and even a potential new service or product line.
If a company is looking at possibly restructuring their business or even their debt, an investment banker can walk them through solutions and help them pick the one that is right for their situation and goals.
The Pitch Book is a pamphlet usually created by entry-level analysts, and it is given to new and existing clients detailing all applicable services the investment banking firm can provide.
Becoming An Investment Banker
After taking a comprehensive look at investment banking, and learning "what do investment bankers do", you might have decided this could be the career for you. This is a decision that shouldn't be made lightly. While being an investment banker is one of the most prestigious of all Wall Street jobs, it is challenging, with long hours and demanding expectations. Below, we examine the requirements and expectations of a career in investment banking.
One of the most appealing aspects of a career in investment banking is the starting salary potential. On average, new graduates with a bachelor's degree can earn from $75,000 to $90,000, and this does not include the hefty bonuses that usually come with the job. A bachelor's degree is required, and usually, this needs to be in the financial/business field. As you move along in your career, you will be expected to obtain a series of investment licenses, in particular, the Series 7, Series 79, and the Series 63.
While most investment banks will hire new graduates, you can propel your career opportunities by working as an intern analyst before graduation. This will give you valuable experience and also might open the door for a potential job after graduation. You will receive extensive, on-the-job training and education during your first year as an analyst, but there are other ways to ensure future promotions.
“Education is the most powerful weapon which you can use to change the world.”
– Nelson Mandela
Working towards a master's degree, in particular, an MBA (Masters of Business Administration) will help you gain a promotion from an entry-level analyst to an associate with the firm. While their job descriptions are similar, the associates are superior to the analysts. Advanced degrees can be costly, especially from prestigious universities. There is a more affordable option to guarantee advancement as an investment banker, but it is not easier.
Getting a Chartered Financial Analyst (CFA) guaranteed avenue towards promotion. To complete this certification, you must pass three levels of examinations and have four years of qualified work experience. Those who have gone this route testify to the significant amount of study time involved in getting your CFA. Just to give you an idea of the difficulty, in July 2016 the CFA Institute reported that only 43% of test takers passed the first exam, only 46% passed the second test, and 54% passed the third.
If you complete your CFA, you will join an elite group. There are only 120,000 analysts holding this certification worldwide. While this is the more difficult of the two advancement options, the CFA typically turns out to be the most affordable. The total costs for the tests and study materials are typically around $12,000. This cost will be minor compared to the overall earning potential as an investment banker.
Whether you are looking for advice when it comes to managing a corporation, or whether you are looking for an attractive career with limitless earning potential, it's important to know, what do investment bankers do. All in all, they play a vital role in the financial wheelhouse of our world. If you are looking for a meaningful career and you are gifted in financial analysis, then this could be the career for you.