What is the role of an investment banker?
Learn about the essential duties and responsibilities of an investment banker, as discussed by experts.
Table of Contents
- An investment banker is a regulated financial intermediary legally allowed to charge a commission for services that involve raising capital
- An investment banker facilitates the sale of a business interest
- Frequently Asked Questions
- What Kind of Education Do I Need to Become an Investment Banker?
- What Is the Typical Career Path for an Investment Banker?
- What Is the Work-Life Balance Like for Investment Bankers?
- What Is the Typical Work Schedule of an Investment Banker?
- What Are the Most Important Qualities to Be Successful as an Investment Banker?
- What Is the Biggest Challenge Facing Investment Bankers Today?
- What Is the Most Rewarding Aspect of Working as an Investment Banker?
Karl Sjogren
Co-Founder & CEO, Fairshare, Inc. | Author, The Fairshare Model: A Performance-Based Capital Structure for Venture-Stage Initial Public Offerings
An investment banker is a regulated financial intermediary legally allowed to charge a commission for services that involve raising capital
They are also known as securities broker-dealer or underwriter. In order to charge a success-based fee for a financial transaction, an investment banker must be registered as broker-dealer, which is the precise term.
For transactions made in the U.S., the banker must register with the U.S. Securities and Exchange Commission and the industry’s self-regulated organization, FINRA, which stands for Financial Industry Regulatory Authority.
The role of a securities broker-dealer is similar to that of a real estate broker-dealer—to assist a party (typically the seller) to enter into a transaction. A real estate broker-dealer is legally entitled to earn a commission on the sale of real estate; a securities broker-dealer may do the same on the sale of securities.
With regard to newly issued stock sold to the public—an initial public offering—the investment banker will line up buyers and advise the company selling the stock—the issuer—on where to price the shares. The issuer makes the decision, but the banker’s advice is almost always taken.
The incumbent business model for investment bankers is to price or value the issuer 15 to 20 percent below what it estimates it will trade at in secondary market trading.
Of course, no one can reliably predict what a company will value in the weeks that follow an IPO, but the goal is clear. The banker wants to ensure that the issuer—who will pay the commission—raises the money it seeks.
The banker also wants to reward investors who sign-up to buy the shares and encourage them to buy other offerings it will broker. The demonstrated ability to sell out an offering makes it easier to get new deals.
A “Dutch Auction” is an alternative to this business model. It has been promoted for years by a prominent San Francisco investment banker, William Hambrecht. In a Dutch Auction, IPO shares are priced where total demand meets the supply of shares.
The result is that IPO shares are priced higher, which means the issuer gets more money. This model has proved to be unpopular with investment bankers because there is no discount for their best customers.
Bryce Bowman
Founder, People First Planning
An investment banker facilitates the sale of a business interest
The banker ensures that the details of the business are presented in a clear, understandable manner to potential investors. Much like a real estate broker, the banker develops marketing materials for the business and ensures only qualified buyers are provided intimate details of the business.
Just as important, a good investment banker guides the transaction through close and will act as an intermediary between the buyer and seller throughout the transaction.
The banker ensures the buyer is able to access all needed details through a due diligence process, and may even assist the seller in summarizing detailed financial data to help the buyer feel comfortable.
In short, the investment banker is the key facilitator of a business transaction and ensures transparent communication through deal closure.
Frequently Asked Questions
What Kind of Education Do I Need to Become an Investment Banker?
A strong educational background is essential for those seeking a career in investment banking. Most investment bankers have a bachelor’s degree in finance, economics, business administration, or a related field.
However, it’s not uncommon for investment bankers to have advanced degrees, such as an MBA or a master’s degree in finance.
In addition to formal education, you must gain practical experience in the financial industry. Many investment bankers begin their careers in the industry with internships or entry-level positions at financial institutions.
These experiences can help build a foundation of knowledge and skills that will be useful throughout your career.
What Is the Typical Career Path for an Investment Banker?
The typical career path for investment bankers involves starting in an entry-level or junior position and working your way up over time. Some typical career paths for investment bankers are:
Junior Investment Banker: In this entry-level position, you’ll work on various aspects of deals, such as financial analysis, market research, and deal preparation.
Associate: Associates are typically responsible for performing more complex financial analyses and processing larger transactions. You may also be involved in preparing proposal documents and other key aspects of the deal process.
Vice President (VP): VPs typically lead deal teams and manage client relationships. They may also be involved in business development activities, such as identifying new clients and securing new business.
Managing Director (MD): Managing directors are senior executives who lead teams of investment bankers and oversee the overall operations of the investment banking department.
Partners: Partners are the highest-level executives in the investment banking division and are responsible for the overall strategy and performance of the division.
Remember that these are only general career paths, and the exact duties and responsibilities will vary depending on the firm and your specialty in investment banking.
What Is the Work-Life Balance Like for Investment Bankers?
Work-life balance can be challenging for investment bankers. The demanding nature of the work and the need to meet tight deadlines and client expectations often require long hours and a high time commitment. Investment bankers often work late evenings and weekends, and the pace of work can be fast and intense.
Nevertheless, many investment banks are trying to improve their employees’ work-life balance. Some investment bankers find that the fast pace and challenges of work are offset by the exciting and dynamic nature of the job, as well as opportunities for professional development and advancement.
What Is the Typical Work Schedule of an Investment Banker?
Investment bankers typically work long and strenuous hours, especially when working on a deal. It’s common for investment bankers to work 60-90 hours per week, including weekends. The workload can be especially heavy during the due diligence process or when a deal is about to close.
In addition to long hours, investment bankers may be required to travel, especially if they work with clients in multiple locations. They may also need to attend evening meetings and networking events to build relationships with clients and other stakeholders in the financial industry.
What Are the Most Important Qualities to Be Successful as an Investment Banker?
To be successful as an investment banker, you must possess a combination of technical skills, financial expertise, and strong interpersonal skills.
Some of the most important qualities investment bankers must have are:
Strong work ethic: Investment banking is a demanding and competitive profession. To succeed, you need a strong work ethic and a willingness to work hard and put in the time and effort required.
Attention to detail: Investment bankers must be meticulous and detail-oriented, especially when preparing proposal documents and conducting financial analysis.
Excellent communication skills: Investment bankers must be able to communicate complex financial information clearly and concisely to clients and other stakeholders.
Strong relationship-building skills: Building and maintaining strong relationships with clients and other stakeholders is an integral part of the investment banking process.
Adaptability and flexibility: The investment banking industry is constantly evolving. To succeed, you must adapt to change and respond flexibly to new challenges and opportunities.
Strong business acumen: Investment bankers must have a deep understanding of the financial industry and the ability to think creatively and to think creatively and strategically about how to raise capital and negotiate deals.
What Is the Biggest Challenge Facing Investment Bankers Today?
The biggest challenge facing investment bankers today are:
• the intense competition for business
• the need to remain at the forefront of an ever-changing financial landscape
Investment banking is a highly competitive field, and investment bankers must be creative and strategic when closing deals and serving clients.
In addition, rapid technological change and the increasing importance of data analytics and automation are changing the investment banking landscape. This, in turn, presents new challenges for investment bankers as they need to stay current with the latest tools and technologies.
What Is the Most Rewarding Aspect of Working as an Investment Banker?
For many investment bankers, the most rewarding aspect of their job is:
Being able to help their clients achieve their financial goals and positively impact the world.
Investment banking is a demanding and fast-paced profession, and the satisfaction of closing a successful deal and seeing the positive results for a client can be incredibly fulfilling.
In addition, investment banking offers a dynamic and ever-evolving career path with professional growth and advancement opportunities. Investment bankers who are driven, hardworking, and dedicated to their clients and their careers can look forward to a challenging and rewarding future in this dynamic field.