What Is the Role of Investment Bankers? What Do They Do? How Much Do They Get Paid? - A Complete Career Guideline

Investment banking jobs have five main types of benefits that will affect your take-home pay. According to Wall Street Oasis, an investment banker receives a base salary, followed by stub bonuses, year-end bonuses, deferred and stock-based bonuses, and signing bonuses. 

Although there have been times when the situation has been difficult, investment banking is predicted to improve by 2024.

What are the responsibilities of an Investment Banker?

Investing is a complicated and confusing process for the layman. The core of investment banking jobs is to provide resources to help companies raise capital.

Investment bankers' work includes mergers and acquisitions, financial advisory, underwriting, and managing the initial public offering (IPO) process.

Apply for investment banker positions? Check out our article for writing a winning investment banking resume.

Managing an IPO

Imagine this: you own a business that started with a small amount of capital. Over time, the business becomes more profitable and you feel the need to expand your target customers, expand your premises, and make bigger business decisions.

The business decisions you want to make require a lot of capital. So, after consulting with an investment banker, and looking at the overall financial situation and future projections, you decide to go public.

Investopedia explains that an Initial Public Offering (IPO) is when a private company becomes available to the public. This means that your company can raise equity capital from public investors who buy shares. The difference in the increase in the stock price is the "payout" that the investors receive.

Investment bankers play an important role in the IPO process. Typically, the investment bank purchases all of the shares directly from the company, which means it gets the initial share price.

When the company officially launches the IPO, the investment bank will sell the shares to the public at a higher price. The difference between the initial share price and the selling price becomes the investment bank's profit.

Seems pretty simple, doesn't it? But it's not. Investment banks also bear a great deal of risk if the valuation process reveals that the shares sold are not worth as much. Sometimes, the investment banker has to sell at a lower price than the company is paying.

That's why investment banking work before an IPO involves complex discussions about the company's value before the company makes major business decisions. 

Mergers and Acquisitions

Mergers and acquisitions are the process of combining two companies into a single entity to increase market share. The combination of distribution networks, products, and services is expected to stimulate good business growth.

Here are some examples of the largest mergers and acquisitions in history, as recorded by DealRoom: 

• Mannesmann and Vodafone (1999) with an acquisition value of $2-2.8 billion at the time. 
• Shenhua Group and China Guodian Corporation (2017) with an acquisition value of $278B. 
• AOL and Time Warner did $182 billion worth of M&A in 2000. 
• The merger of ChemChina and Sinochem was a Chinese government plan that took place in 2018, worth $245B. 
• Gaz de France and Suez also conducted mergers and acquisitions with a value of $182B in 2007 and Suez.
• Two British pharmaceutical companies, Glaxo Wellcome and SmithKline, merged in 2000 for $107 billion.

Although often used together, the terms merger and acquisition are legally distinct. A merger is a process in which two companies of the same level merge into one. An acquisition, on the other hand, is the purchase of a smaller company by a larger one.

M&A investment banking is the department responsible for providing input and advice to companies during the merger or acquisition process. Investment bankers can work on both the sell side and the buy side.

The M&A process can be divided into two parts: targeted deals and broad deals. The difference in the type of transaction affects the role of the investment banker.

If the M&A transaction is targeted, it is likely that the buyer and seller have already spoken or discussed the transaction prior to engaging in investment banking services.

For example: Representatives of Company A and Company B have met to discuss a possible merger in the next few years. After the meeting, both representatives seek the advice of an investment banker to calculate the expected benefits and risks.

A targeted transaction means that the firm only needs to focus on finding financial information about both Company A and Company B in order to provide objective advice.

On the other hand, in a broad transaction, a large company asks the investment banker for advice and consideration on which companies can be acquired for business development. 

Investment bankers have two roles in broad transactions: buy-side and sell-side. In buy-side deals, the investment banker gives a presentation on which companies are potential buy-side targets. The number can be dozens or even hundreds.

On the other hand, on the sell side, the investment banker presents potential companies to be acquired by potential clients or companies (that were not previously interested in acquisitions).

So you could say that in the M&A process, the investment banker's job is to be the middleman between two (or more) companies that want to do a transaction.

Financial Advisor

Financial advisory services are actually required in every investment banking transaction. However, this section is discussed specifically because financial advisors in investment banking are somewhat different from other financial advisors.

Financial advisors outside of investment banking often work for individual clients. These clients may come from a variety of backgrounds. According to the United States Bureau of Labor Statistics, 25% of financial advisors are self-employed.

Meanwhile, financial advisors in the investment banking system work for companies that seek advice from investment or commercial banks. This means that financial advisors and investment bankers work on different levels.

Often cited as playing an important role in investment banking, do you know what services do financial advisors provide?

Help identify investment opportunities.

Is this the right time for an IPO? Which companies are profitable to acquire? What is the company's projected future earnings growth? These are the questions a financial advisor will answer. Through extensive analysis and research, the financial advisor will guide the company in choosing the most appropriate strategy.

Helping the company choose the method of asset disposal

Are you familiar with the terms spin-off, split-off, and carve-out? If not, it's time to learn about the different methods of divesting assets because the investment banker will be involved in the decision-making process.

Spin-off: 

The separation of a business unit from a parent company with the goal of creating a new company that is operationally and financially independent.

According to the Corporate Finance Institute, a spin-off is an attempt to restructure management in order to increase profits. This decision also reduces the burden of agency costs.

A spin-off leaves the shareholders of the parent company with two types of shares (and this can mean profits). Meanwhile, the parent company gets about 20% of the shares of the subsidiary.

Split-off: 

A split-off is an attempt to restructure the company's capital. Shareholders are usually offered the opportunity to sell the shares of the parent company and receive the shares of the subsidiary.

Carve-out: 

Last but not least, a carve-out is basically the release of all the shares of the subsidiary through an initial public offering.

Valuation and financial modeling

How do you determine the right price when buying or selling a company or asset? This is where valuation and financial modeling come in.

Valuation is the myriad of data and information used to determine the value of companies, assets, and securities. This source mentions that investment banking systems typically use discounted cash flow methods, asset-based approaches, and comparable markets.

Financial modeling is an effort to compile the entire financial performance of a company, consisting of income statements, cash flow statements, and balance sheets. By analyzing these reports, the investment banker creates a picture of future projections, company value, and other factors.

The results of the analysis can be used to assess risks and challenges, identify investment opportunities that can be executed, and increase profits.

• Help manage transactions and negotiate deals

As mentioned in the previous paragraph, the investment banker is a facilitator. He works closely with the client to determine what is needed to negotiate deals. 

The investment banker does not work alone. He or she will coordinate with other professionals such as lawyers, accountants, senior bankers, and others to gain a comprehensive perspective.

Capital Raising

Equity, debt, and a combination of both (or so-called hybrid) are the three methods of raising capital. DealRoom mentions that raising capital is an effort for business development or additional investment for assets, building partnerships, and others.

Investment banking analysts are also involved in the company's capital raising discussions, such as advising on the best option to choose, structuring financial transactions, acting as underwriters, and building syndicates of other investment banks.

Debt 

Debt in capital raising is a request for a loan from a third party. The lender can be the bond market, some financial institutions, and private equity funds.

Broadly speaking, there are four types of debt in a business. The first is a secured debt, unsecured debt, tax-exempt corporate debt, and convertible debt.

The type of debt a company takes on actually depends on its objectives and financial condition. Investment banking provides financial advisory services to identify optimal debt financing options.

Equity capital

Equity is the net value owned by shareholders or other entities after deducting total liabilities. The difference between assets and liabilities is what signifies the investment and contribution of shareholders in the accumulation.

Why is equity important? As the value remaining after deducting liabilities, equity shows the company's financial condition, which can be a bargaining chip for investors.

In the investment banking industry, equity research analysts are at the forefront of determining whether or not a company is worthy of raising capital. 

How important is the position of equity research analyst?

The primary role of equity research analysts is to provide forecasts and estimates of the earnings of the companies they cover. As mentioned by Investopedia, during earnings season, companies report their total revenue for each quarter.

That's when an equity research analyst will evaluate all the incoming reports. The results of their analysis are used to determine the financial performance of the company. 

The analysis and research skills of an equity research analyst must also be supported by the ability to follow general and business news in various media. 

Why is this necessary?

Equity research analysts need to be aware of the conditions that cause the value of a company's stock to change. For example, public outrage over a company's policies can cause the stock price to drop immediately.

At the level of companies that use the investment banking system, capital is usually raised through IPOs, family offices, private equity investors, and the use of mutual funds and asset managers.

What you need to know is that raising capital is a tough time even for companies. The Harvard Business Review noted that the time it takes for founders to get approval can take 6 months due to the many reviews that must be passed.

That's why the IPO process is often cited as a sign of a company's progress. Many small companies eventually give up because the future of their business is at stake. 

An Investment Banker Career Path

Working in investment banking can be demanding, but it also offers a clear career path and a balanced salary. It's no wonder that banker positions are among the most sought-after jobs. Here's the career path of investment bankers.

Summer Intern (0 years)

This position is not only open to students but also to those interested in learning more about investment banking. JP Morgan Company also offers a nine-week internship course that can be taken virtually.

Interns work with investment banking analysts and associates. This program is usually available starting in June for the next 10 weeks. However, prior to this, interns will attend a week-long in-depth training program.

Intern responsibilities include 

• Market research.
• Reviewing and organizing financial data.
• Analyzing financial data.
• Developing financial models.
• Preparing business development presentations.
• Communicate with internal and external teams.
• Prepare documentation required by senior management.

Analyst (0 - 3)

When you've been in the industry for quite some time, you can become an investment bank analyst:

• Perform financial analysis and valuation using models in accordance with firm standards.
• Work on restructuring and recapitalization transactions.
• Integrate strategic ideas based on analysis, forecasts, plans, and research. Present the results of the integration to decision-makers.
• Oversee various advisory and financing transactions.
• Supervise and assist interns or new hires in adapting to work processes.
• Prepare weekly operational reports and operational status meetings.

Associate (4 - 8 years)

Investment Banking Associates are one level above Analysts. Their main responsibilities are:

• Reviewing the work of investment analysts. 
• Carrying out instructions from the VP, Director and MD. These instructions are then communicated to the analysts.
• The Investment Banking Associate will also have a lot of communication with professionals regarding the documents required in the transaction.
• Attend meetings with clients and prospects. Here, the Investment Banking Associate will do a lot of presenting and answering client questions regarding the details of the financial model used.

Vice President

• The Vice President will communicate extensively with directors and CEOs to determine future strategies. He/she is also responsible for communicating the director's views to associates and analysts.
• S/he reviews the work of associates and analysts before it is submitted to the Managing Director and Managing Principal.
• Communicates regularly with clients, prospective buyers, sellers and investors and responds promptly to investment transactions.

Senior Vice President

• Approach investors to complete transactions. 
• Develops business development strategies to reach more prospects.
• The Senior Vice President does a lot of fieldwork to meet with a potential client.

Managing Director

• Managing directors are the top executives of investment banks. As a decision maker, he or she interacts with politicians, economists, entrepreneurs, investors, and all sorts of other professionals.
• Meetings with professional figures are taken into account in the policies to be adopted by the investment bank. He also directly supervises the performance of the SVPs and the overall operations.

Not everyone who works in the investment area can reach the position of managing director. There are some people who get stuck in a career path, and this is often the case with senior vice presidents.

Investment Banking Salary

If you decide to be an investment banker, some research on salaries will make it easier for you to negotiate later. In addition to a fixed salary, investment bankers also receive performance-based bonuses.

Data from Wall Street Oasis shows the following: 

• Summer Internship (Analyst) = Base salary of $65,000 - $80,000 per year. Plus an average year-end bonus of 10% of base salary.
• Analyst = with a base salary of $100,000 - $120,000 per year. Plus an average year-end bonus of 50% - 100% of base salary.
• Associate = with a base salary of $150,000 - $200,000 per year. Plus an average year-end bonus of 50-100% of base salary.
• Vice President (VP) = with a base salary of $200,000 - $225,500 per year. Plus an average annual bonus of 100 - 150% of base salary.
• Senior Vice President (SVP) = with a base salary of $250,000 - $500,000 per year. Plus an average annual bonus over 100% of base salary.
• Managing Director (D) = with a base salary of $400,000 - $600,000 per year. Plus an average year-end bonus of over 100% of the base salary.

So what are the components of an investment banker's total annual income?

Base Salary 

A base salary is a fixed amount of income that a firm must pay to its employees. The amount of base salary is agreed upon during the recruitment process and is stated in the employment contract.

Unless the company is required to pay overtime, the amount of the employee's monthly and annual salary remains the same. 

This is different from salaries paid on an hourly basis. However, hourly employees cannot work more than 40 hours in a week. If they exceed this limit, the company must compensate them in accordance with the applicable standard rules.

The amount of base pay for each employee may vary depending on: the geographic location of the workplace, bargaining results, total benefits, position or job title, and level of experience.

Stub Bonus

Many companies have a financial calendar that is used to transfer salaries, bonuses, and other payments. However, sometimes there are employees who start or leave a job in the middle of the year when the pay date has passed.

To anticipate this, companies issue stub bonuses. This is a bonus based on a pro-rata calculation. This system is considered fair to all parties.

For example, if an employee has a target bonus of 30% of annual salary and has worked for 6 months, he will receive a stub bonus of 15%.

The stub bonus system is not unique to the investment banking industry. Companies that use performance-based bonuses typically use the same system.

Year-End Bonus

Did you know that year-end bonuses are often used by employees to buy a house, pay off a mortgage, buy a car, go on vacation, and so on? This is common because the amount of the year-end bonus exceeds the base salary and total compensation.

Thus, the year-end bonus is compensation over and above the employee's salary. This extra bonus is the company's way of rewarding employees who have worked hard. According to Forbes, the amount of end-of-year bonuses at the professional level to senior level executives is quite large.

Deferred and Stock-Based Bonuses

When your investment banking resume is being reviewed, don't forget to ask the hiring managers about deferred and stock-based bonuses. The deferred and stock-based bonus program refers to the company's policy of paying employee bonuses in the form of stock rather than cash.

However, the payment in shares is not a given. Employees must wait several years to receive the shares. Typically, those who receive deferred shares or deferred and share-based bonuses are executives and founders of the company.

Signing Bonus

A signing bonus is a one-time payment given to a prospective employee as an incentive to accept a job offer. Signing bonuses are typically given by companies to highly qualified employees.

 So, above are the types of bonuses you will receive. Does this information make you more excited about creating an investment banking resume?

Investment Banking Prospects

This is good news for fresh graduates who are still unsure about creating an investment banking resume: According to a recent report, investment banking jobs are expected to grow by 1.4% between 2024 and 2028.

There are fears of technological disruption in the future as banking jobs are replaced by artificial intelligence (AI). According to the Forbes report, AI has reshaped the banking world.

But does this mean that humans will actually be replaced? This is a question that will take a long time to answer. Banking is not just about machines, systems and computers. The hinges of the banking world require communication, human to human.

Common FAQs about being an investment banker

1) Do I need a specialized degree to get a job in investment banking?

Yes, you should have at least a college degree in finance, math, or economics. In fact, Investopedia states that liberal arts majors have a chance of getting this job on Wall Street. However, a degree in business and math is the best option.

2) What is the work-life balance of an investment banker?

Investment banking is a stressful world. The work-life balance in this field is a top question for many candidates. Getting enough rest is crucial because investment banking is a fast-paced business with high stakes.

Serving high-profile clients means that an investment banker will often find himself or herself in uncomfortable situations. 

Understanding the risks of the job is important because you know what you are sacrificing in the future, keep in mind that this is a competitive and tough industry. 

• Long working hours

A normal working week for an employee is 40 hours. In the world of investment banking, the routine of coming to work at 9 and leaving at 5 is not uncommon. We can classify it as rare.

You often hear of a banker who goes home for a morning shower and then rushes back to the office because work is piling up or there is an urgent meeting. That's pretty much what a day in investment banking looks like.

• Clients always come first

You understand that the bank's clients are large corporations and governments that are used to working quickly. Under any circumstances, the company will ask you to be on call when the client needs certain data or information.

This principle will also change your entire daily routine. Going back to the first reason, your working hours will be longer. It's not impossible that you'll also find it more difficult to enjoy your weekend in peace.

• Ambitious environment

Investment banking employees are used to constantly changing situations. For every job they do, they are also guaranteed a hefty bonus. Indirectly, this makes bankers more ambitious.

If you're not used to this and find it difficult to thrive in a situation where performance is the main measure, investment banking is probably not for you.

• Multitasking

Does multitasking speed up or slow down the work process? Some sources claim that multitasking actually hinders productivity and increases errors.

However, dealing with multiple files, calculations, analysis, diverse data information, and communication is what investment banking professionals are used to.

This type of work situation will not change in investment banking. This means that you need to be physically and mentally prepared long before you put together your investment banking resume.

3) What do I need to learn to become an investment banker?

The investment banking industry uses many complicated terms. Here are some common technical terms used within the investment banking business:

• Issuer: An issuer is a party that registers, sells, and offers securities for sale to the public. Issuers can be individuals, corporations, joint ventures, associations, or organized groups. Issuer offerings may be in the form of bonds, debentures, futures contracts on securities, commercial paper, asham, and others.
• Underwriting: Underwriters, usually part of investment banking, assume financial risk in exchange for a profit. In investment banking, the underwriter becomes an agent to limit the total amount of risk for a certain fee.
• Syndicate: Groups of investment banking members who work together to manage large transactions. Syndicates are found in underwriting, banking, and insurance.
• Brokerage: A broker is an individual or firm that acts as an intermediary between investors and issuers in the capital markets or futures trading in the purchase and sale of investments.
• Capital Market: Capital market is an activity of public offering and trading of securities. The economic function of the capital market is to bring together investors and issuers. While from capital market activities, investors will get a return.
• Debt Capital Market (DCM): The debt capital market is preferred for debt securities exchange activities. Companies can sell debt securities to investors to raise capital. From the sale, the seller will earn money and the investor will later earn interest from the scheme. 
• Equity Capital Market (ECM): ECM may be more familiar to the general public. This capital market has activities of stock marketing, initial public offering (IPO), derivatives trading, share placement, share price formation. Who is active in ECM? There are brokers, investors, venture capitalists, private investors, investment banks and others.
• Futures contracts: A futures contract can be achieved when the seller and buyer of the asset have agreed to buy and sell at an agreed price and also set a specific date for the continuation of the transaction.
• Hedge funds: Hedging is a step taken to minimize the risk of loss if the stock price moves in a negative direction. The way to reduce potential losses is to diversify the portfolio.
• Interest Rate: The interest rate is the fee paid by the borrower to the lender for borrowing money.
• Financial Analysis: Financial analysis is the process of evaluating a company in terms of its business, project sustainability, overall budget, and other financial transactions. 
• Bonds: Bonds are medium- and long-term debt securities that can be traded. Bond buyers are rewarded with interest rates generated from the borrowing process.
• Preferred stock: Preferred stock is owned by a specific group of people. These securities show that an individual or group has a higher right to the company's assets and profits than ordinary shareholders.
• Securities: Securities are parties that have been licensed to conduct business activities as broker-dealers for buying and selling stocks.

From these terms, you can expand to other investment learning materials.  It would be better if you took a course aimed at teaching young bankers.

4) How can you expand your network when working in the investment banking industry?

If you're looking for a job in the investment banking business, it will be easier to pass if you have a good network with your boss, fellow bankers, or even clients. Another benefit is that networking will also make it easier for you to get opportunities to move up.

• Broaden your horizons

Your broad horizons and knowledge are reflected in the way you speak. Your boss and clients will easily appreciate you if you can build communication with intelligent and entertaining conversations.

You can broaden your horizons by reading more books, following the latest news, not hesitating to ask questions, being open to criticism and suggestions, and being active in training programs and social gatherings.

• Train your confidence

Even though you are a junior, you need to start learning how to put yourself in a good position. This doesn't mean staying silent during team discussions or meetings. Start by convincing yourself that you are capable and can do it, and bring up your ideas carefully and at the right time.

If the meeting is too big to start with, you can try it in smaller circles, such as chatting with seniors or colleagues.

• Be open to possibilities.

Eliminate fear and embrace the challenges that lie ahead. If your seniors offer you a new project or task that you've never done before, take the opportunity to improve your skills.

Networking doesn't happen in 1 or 2 days. Sometimes it takes years to make connections in different areas. Make yourself as pleasant as possible and present yourself as a reliable person.

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