The principal purpose of an investment bank (and of investment banking in general) is the underwriting of new securities issued by an investment bank's clients. An investment bank may also provide other services, such as professional advice, working with mergers & acquisitions, and private wealth management.
Departments at an Investment Bank
There are a number of different departments within investment banks. The following is a list of departments at a typical investment bank:
- Investment research
- Human resources (also known as Human capital management)
- Investment banking
- Investment management
- Legal and management controls
- Merchant banking
- Private equity
- Securities & Trading
- Information Risk Management
Candidates who have a Bachelors or Masters degree and little or no experience in Investment Banking usually apply for Analyst positions. Candidates with a Masters (MA) in Finance and MBA candidates with a qualifying period of work experience usually apply for Associate positions.
To find out more about what you will be doing working at an investment bank, see the article on what's involved in being an analyst.
Tier 1 & Tier 2
Firms are divided into tier 1 and tier 2 firms. This distinction 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 investment banks or fund managers.
The Bulge Bracket was a term used up until September 2008 to describe the largest investment banks (in terms of size and in terms of profitability). These were generally regarded to be Goldman Sachs, Morgan Stanley, JPMorgan, Citi, UBS, Credit Suisse, Merrill Lynch and Lehman Brothers.
The second half of 2008 saw an unprecedented shift in the definition of the Bulge Bracket, as Bank of America acquired Merrill Lynch, Lehman Brothers failed, and Morgan Stanley and Goldman Sachs converted themselves into traditional bank holding companies - see article.
These were all effects of the global Credit Crisis that was precipitated by Subprime mortgage failures.
Front, middle and back office
All roles in investment banking 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:
Investment Banking involves advising the world's largest organisations on mergers, acquisitions, as well as a wide array of fund raising strategies. This is, on average, the most prestigious and highest paid department in the bank with first-year analysts typically making £60,000 upwards (depending on individual, team and firm performance).
Markets are then split into further divisions; sales, trading, some research and also structuring. Though the average investment banker will make considerably more than the average trader, the best trader will make significantly more than the best investment banker.
Middle office roles generally comprise 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 investment banking 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 what is being performed.
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Relative Prestige of Different Career Paths
Tier 1 Choices - Front Office Equivalent
- Investment Banking Division
- Private Equity (Incredibly tough to get into. Normally we advise you to forget about this.)
- Equities Research or Fixed Income Research
- 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 structurers.
- FX Sales and FX Trading (excluding "trading arcades")
- Asset Management
- Private Wealth Management (which also includes Stockbroking)
- Management Consulting
Tier 2 Choices - Middle Office Equivalent
- IT Consulting
- Technology Division of an Investment Bank
- Risk Management
- Actuarial Consulting
- Tax Consulting with a leading accounting firm
- Ratings Agencies
- Independent Research Firms
Tier 3 Choices - Back Office Equivalent
- Finance division of an investment bank (which would primarily focus on Product Control, but possibly also Risk Management and Treasury Management)
- Human Resources
- 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 Compliance with a leading accounting firm
- Insolvency with a leading accounting firm
Academic Requirements for Investment Banking
Investment banking comprises of many different roles and positions. Some, such as trading, require 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 expected that you have achieved a 2.1 honours in any degree discipline to be considered for a position at an investment bank, with preference being given to first class graduates. Typically, top tier banks will house some of the world's most impressive individuals, and thus a wider commitment to excellence in areas outside of academia is also required.
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 AAB/AAA is the minimum required.
A-level equivalents such as International Baccalaureate and Scottish Highers are universally acceptable.
What university do I need to go to?
For British graduates entering investment banking on graduate schemes in London (this accounts for approximately 90% of the intake), there is a clear trend of preference amongst the banks for Oxbridge and Russell Group graduates, although investment banks do accept applications from all university graduates. Attending LSE/UCL/ Warwick/ Imperial/Cass Business School is also beneficial.
The majority of the intake top tier front office roles at the top 6 investment banks, namely Goldman Sachs, Merrill Lynch, Morgan Stanley, Citigroup, UBS 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 fewer 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 opportunities are there?
Opportunities in investment banking can begin from a young age, especially if you have the appropriate contacts. For example, if you have a family member who is an MD at Commerzbank, try and get them to get you any experience they can. Anything that shows initiative from a young age will only work in your favour when you begin to make applications for graduate jobs. Work experience and internships also help you to start building up your ‘network’ within the investment banking industry.
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, (note - this programme did not run in 2008, due to the financial unstability).
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?
Starting salaries for front office usually start between £32k to £40k, with the investment banking division making significantly more. Generally speaking, middle and back office 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.
Some new graduates are given a golden hello of £4,000 to £8,000, usually paid after a set period of time working for an investment bank.
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 new graduate banker can receive bonuses which run from 50-150% of their base salary 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 five years experience can expect to regularly make a 6 figure or even seven 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 should be worth nothing that due to the credit crisis and recent legislation, bonuses have been cut dramatically. UBS and Goldman Sachs have made an unprecednted move this week of eliminating bonuses for the firms top dogs - judging by what's happened, it's quite possible that the era of big bonuses has come to an end - in particular, bonuses will never return to 2006 levels (60-100% bonus).
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.
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.