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Investment banking

Definition of an investment bank

An investment bank's principle purpose is the underwriting of new securities issued by its clients. An investment bank may also provide other services, such as professional advice, working with mergers & acquisitions, and private wealth management.

Departments

There are a number of different departments within an investment bank.

The following is a list of departments at a typical investment bank:

Tier 1 & Tier 2

Firms are divided into tier 1 and tier 2 firms. This distiction is made by size of the firm. Tier 1 generally relates to the bulge bracket firms, and other firms are in tier 2.

Tiering does not apply to specialist smaller banks or fund managers.

The Bulge Bracket

Bulge Bracket is the term used to describe banks who the largest in terms of size and in terms of profitability. These are generally known as Goldman Sachs, Morgan Stanley, JPMorgan, Merrill Lynch and Lehman Brothers. However, there are other banks which are bigger in certain locations such as UBS, Credit Suisse and Deutsche Bank in Europe and Citigroup in the U.S.

These banks are also known as 'tier 1' banks.

Front, middle and back office

All roles fit into three categories;

Front office is generally described as a revenue generating role.

There are two main areas within front office:

  • Investment Banking and
  • Markets, which includes:
    • Sales
    • Trading
    • Research
    • Structuring

Investment Banking is primarily advisory on mergers, acquisitions and fund raising.

Markets is then split into further divisions; sales, trading, some research and also structuring.

Middle office roles generally comprise of risk management positions. This can be seen as more cost cutting roles, as middle office positions involve analysing and evaluating the risk taken by front office employees. This can be done by setting limits on the amount of money available to trade with, for example.

Back office roles are mainly operations roles and include the technology division. Operations employees are used to make any transfers, and generally ensuring there are no errors in hat is being performed.

Relative Prestige of Different Career Paths

Tier 1 Choices - Front Office Equivalent

  • Investment Banking Division (which includes Mergers & Acquisitions, and Corporate Finance)
  • Equity Capital Markets and Debt Capital Markets (also called Origination) - ECM and DCM are sometimes part of IBD.
  • Fixed Income Sales or Equities Sales
  • Fixed Income Trading or Equities Trading - sometimes clients are interested in structuring, but typically this would fall within the trading umbrella. Equities and Fixed Income Derivatives are desks within the Fixed Income and Equities divisions, and they are the people who have a team of structurer's.
  • Equities Research or Fixed Income Research
  • Asset Management
  • Private Wealth Management (which also includes Stockbroking)
  • Private Equity (Incredibly tough to get into. Normally we advise you to forget about this.)
  • Management Consulting
  • Law

Tier 2 Choices - Middle Office Equivalent

  • Hedge Funds (You will be working as a Trading Analyst or a Research Analyst, depending upon how trading oriented or investment oriented the hedge fund is).
  • IT Consulting
  • Technology Division of an Investment Bank
  • Risk Management
  • Investment Consulting with the Big Four Investment Consulting firms.
  • Actuarial Consulting
  • Ratings Agencies
  • Independent Research Firms

Tier 3 Choices - Back Office Equivalent

  • Marketing
  • Operations
  • Finance division of an investment bank (which would primarily focus on Product Control, but possibly also Risk Management and Treasury Management)
  • Human Resources
  • Compliance
  • Working as a desk assistant with a team of sales people or traders in the hope of working your way in to a sales or trading position
  • Inter-dealer Broking (Garban, Inter Capital, Tullett and Tokyo)
  • Finance division of prestigious multinationals
  • Assurance (same thing as Audit) with a leading accounting firm
  • Tax with a leading accounting firm
  • Insolvency with a leading accounting firm
  • Advertising

 (Source: Harrisson Careers)

Academic Requirements

What university do I need to go to?

For British graduates entering investment banking on graduate scheme in London (this accounts for approximately 90% of the intake), there is a clear trend for university preference amongst the banks. The list is based upon statistics, however it is merely a guideline.

Although banks accept applications from all university graduates, you will be demonstrating commitment to career by being from a prestiguous university and they will not need to determine if investment banking is what you want to do.

  1. LSE
  2. Oxford, Cambridge
  3. Imperial
  4. Warwick
  5. UCL
  6. CASS, KCL
  7. Reading (ICMA)
  8. City (undergrad degrees)
  9. Manchester
  10. Aston
  11. Bristol
  12. Nottingham
  13. Bath
  14. Loughborough
  15. York
  16. St Andrews
  17. Edinburgh
  18. Durham
  19. Royal Holloway
  20. Birmingham

LSE is particularly beneficial as it provides numerous networking opportunities from young investment banker alumni. LSE also has an investment society and a business society. In both cases, students receive regular talks directly from investment banks about careers, opportunities and applying. Crucially, it also provides an informal opportunity to meet front-office staff from the firm, who can provide real insight into those roles.

The majority of the intake top tier front office roles at the top 6 investment banks, namely Goldman Sachs, Merrill Lynch, Morgan Stanley, Citigroup, Lehman Brothers and JPMorgan will come from the top 6 universities on the list.

Below that, candidates from universities further down the list will find it easier to get into middle-office or back-office roles, and may be able to access front-office roles at non-big 6 banks such as ABN Amro, BNP Paribas and Commerzbank.

It was worth noting that some of the most prestigious universities in the country appear lower down the list. This is due to their poor track record of getting people into investment banking jobs. The reasons may include less comprehensive careers advice groups and less recruiting events run by investment banks. Many northern universities appear further down the list. Candidates who fail to make it into the top 5 universities are normally recommended to take an industry focused investment banking degree such as the BSc Investment and Financial Risk Management from Cass Business School or those of the ICMA centre in Reading.

What A-levels do I need?

Specific A-Level subjects are generally not that important as long as you do well in them. Maths should almost definitely be taken. Alongside Maths, good choices would be Economics, Business Studies, Accounting, Physics, Further Maths. An essay-based subject and/or a language would also compliment these choices. Minimum grades required to enter Banking are on the up, and as it stands ABB/AAB is the minimum required.

A-level equivalents such as International Baccalaureate and Scottish Highers are universally acceptable.

Which degree do I need to study?

Investment banking comprises of many different roles and positions. Some, such as trading, require a great technical skills, where as others might require great people skills or abilities to work under pressure. Consequently, it is possible to enter Banking with a variety of degrees. Examples include Economics, Politics and even Geography. Corporate Finance and Sales roles tend to be filled by graduates from all kinds of degrees including Arts, where as the majority of Trading and Quant positions are taken by people who have completed degrees with a substantial mathematical element in them, such as Economics, Mathematics, Business Studies (normally only BSc's accepted), Physics, Chemistry, Engineering, or Accounting & Finance.

What degree classifications are acceptable?

It is generally accepted that you must have achieved a 2.1 honours in any degree that you have chosen to be considered for a position at an investment bank, with preference being given to first class graduates.

What opportunities are there?

Opportunities can begin from a young age if you have contacts. For example, if you do have an uncle who is an MD at Barclays Capital, try and get him to get you any experience he can. Anything that shows initiative from a young age will only work in your favour. Not only this, but you can begin to start building up your ‘network’.

Formal opportunities begin for A-Level students where a number of banks run programmes in partnership with the Windsor Fellowship. This can range from the ‘I have a dream…’ programme at Deutsche Bank which is four weeks long, to the Merrill Lynch Atlantic Fellowship programme which is two weeks long, but has activities in both London and New York. First year spring/Easter programmes have also become popular. These are usually ranging from a week to two weeks long and can be done in a number of divisions. Big name banks such as Goldman Sachs and Morgan Stanley take part in these schemes.

Second year (or penultimate year) summer internships are the most popular and most competitive pre-graduate programmes. They let you gain ‘hands-on’ experience in the industry and allow you to find out if banking is for you or not. Internships can be done in most divisions of an investment bank, and applying for several different internships may give you a broader understanding of the industry and the opportunities available.

Graduate programmes are, in a sense, perhaps the most important programmes. These are again highly competitive however they are an almost essential starting point for a career in investment banking. It is important that you research banks and the divisions you apply to. You will need to demonstrate clear understanding at interview of what you are getting yourself into. Graduate positions are often part filled up by former interns, which helps to underline the benefits of internships.

What salary can I expect?

Golden hello

Some new graduates are given a golden hello of £4,000 to £8,000, usually paid after 6 months within the firm.

Salaries

All front office, middle office and back office positions start between £32k to £40k. Generally speaking, salaries are good but not incredible, however you should not select a firm or position based upon the salary offered to you, as your bonus will have a very material impact on your earnings.

With the credit crunch late 2007 & start of 2008, large investment banks are starting to outsource jobs to other locations apart from the financial centres (London, New York etc.). Salaries can start as low as £15k (without a golden hand shake).

Bonuses

All front office, middle office and back office staff will qualify for a bonus. New graduates may have to go through a probationary period (which may be up to 2 years) before they are eligible for bonuses, but this does not apply in all cases.

Bonuses vary across both the industry, the line of service, the market's performance, and your performance during the period.

All employees are 'rated' according to a predetermined scheme and this decide your bonus. A top rated new graduate banker can receive up to £50,000 in their first year.

Those that work in corporate finance can also make similar figures, dependant on what deals they have worked on that year.

Traders generally receive a percentage of what money they have made for the bank. This varies greatly, but a typical top rated trader will receive a bonus of around £20,000 in their first year in good market conditions. As traders gain experience and responsibility, they are given more funds to manage, and consequently a top rated trader with 5 years experience can expect to regularly make a 6 figure or even 7 figure bonus.

As a general rule of thumb, the average banker is going to earn more than the average trader. However, the best trader is going to earn substantially more than the best banker.

It is worth noting that all bonuses are performance related. Although you can make the dreamy kinds of money described here, only the best do,, while the rest will slave away trying.

Bonuses are never guaranteed; you may not receive one at all in a terrible year. Make sure you are fully aware of this before you join investment banking.

What hours will I have to work?

The hours in investment banking are long, and you should not even consider this industry if you demand a standard 9-5. Exact hours vary across different lines of work, with some, such as corporate finance and other deadline driven lines having to work extremely long hours, potentially approaching 100+ hours a week.

Sales and trading roles may benefit from more manageable hours as this is generally shift work. It is very frequent to have to work on UK bank holidays as it is not bank holiday elsewhere in the world.

There are usually no 'overtime' benefits such as extra holiday or pay; the long hours are considered standard with the job.

What else can I do to enhance my application?

Extra-curricular activities are often used to distinguish the ‘better’ candidates as they have demonstrated initiative and motivation to take part in activities other than just studies. Young Enterprise is a good experience to portray your ‘entrepreneurial’ skills. Investments on the stock market are also a good demonstration of your knowledge and interest in the field.

Any clubs/societies that you feel should be mentioned should also be included in your application. They can represent a different variety of things, and if you were the founder/president/chairman of a society then this definitely should be mentioned. If you participate in any sport this is certainly worth mentioning as it demonstrates high energy levels, motivation and potentially, success.

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