What is the role of an investment banker?
Learn about the essential duties and responsibilities of an investment banker, as discussed by experts.
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.
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.
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