Investment Banking Vs. Investment Management
Investment Banking and Investment Management are two of the most prestigious and competitive areas in finance that typically attract only top talent from universities with a good reputation. Along with strong academic credentials, candidates are expected to be able to demonstrate strong numerical capabilities and financial literacy, as well as communication skills. However, those that have not studied business should not be discouraged from applying to these areas of the market as professionals with expertise in other sectors, for example, healthcare, technology, or telecoms, could be quite a good fit for roles that require specialist sector knowledge. Degrees in challenging subjects like mathematics or physics are also quite well-received. Professional qualifications are another route of building strong industry credentials and regulators usually require a minimum threshold of competence, that is demonstrated through passing specific exams, depending on the role. Both careers would require longer than the standard 40 hours week, especially for those in investment banking and areas of investment management like hedge funds and private equity, but in return the earning potential is significant. In addition, both carry excellent exit opportunities for those seeking a change.
Key Learning Points
- Both career pathways have very-high standards and require robust numerical, and financial literacy, along with a range of personal skills.
- Investment banks serve their clients by offering support, advice, and facilitation across major deals, related to IPOs, M&A, Debt financing, and Broker execution.
- Investment managers are responsible for running their clients’ money. That involves generating investment ideas, constructing portfolios, and ongoing portfolio management.
- Professionals in both careers receive very competitive salaries, but however, those in investment management can vary significantly in line with the different areas of the market.
What is Investment Banking?
Investment banking is a specialist division at banks that aims to create financial capital for a diverse set of clients. These could range from public and private companies to institutions and governments. One of the objectives of investment bankers is to underwrite new debt and/or equity securities for its clients and support them in the sales process. From a debt perspective, that includes bond offering, while raising capital through equity is done through an Initial Public Offering (IPO). Other activities include assisting, advising, and facilitating Mergers and Acquisitions (M&A), company restricting or executing broker trades for institutions and private investors.
The day-to-day activities in investment banking are quite diverse and depend on the function and seniority of the position. Some roles include in-depth security research that formulates buy, hold or sell recommendations, while other operate market-making activities by connecting buyers and sellers and providing liquidity. The structure of the hierarchy varies across different institutions, but typically new entrants start as analyst or associate and then work hard to progress to vice president or managing director. The job could be quite challenging and investment bankers are often given short deadlines to work on a specific project or part of a deal, which adds more workload on top of their usual duties.
In terms of potential employers, typically investment banks are classified according to their size considering several factors including the average amount of trades made, the number of offices an investment bank has, and the number of employees. Then, they normally fall within four categories – regional boutique banks, elite boutique banks, middle-market banks, and bulge bracket investment banks (smallest to largest). The latter include large US names such as JP Morgan, Goldman Sachs, Citigroup, Bank of America and Morgan Stanley, as well as HSBC and Barclays from the UK, the French BNP Paribas and Societte Generale, the Swiss UBS and Credit Suisse and the German Deutsche Bank.
What is Investment Management?
Investment managers are responsible for managing the money of their clients – this may include various sub-industries like asset management, hedge funds, private equity and wealth management. They run various investment mandates that differ in their objectives, risk, and eligible instruments. Their client base could also be quite diverse as well, ranging from institutions like sovereign wealth funds and pension funds, to insurance companies, financial advisers, charities, and individual investors. Investment managers run their portfolios across multiple asset classes such as more traditional like equities and fixed income, real assets like property and infrastructure, and more complex such as private equity or debt, commodities and derivatives. Normally, the more complex and higher risk products are offered only to sophisticated clients or high-net-worth individuals. They can be structured as hedge funds, which required large initial investment and a pre-determined lock in period, during which investors have no access to their funds (this is also typical for private equity strategies). In contrast, individual investors are typically offered liquid pooled products that offer daily or intra-day trading such as mutual funds or Exchange Traded Funds (ETFs).
The hierarchy in investment management is relatively flat compared to investment banking. New joiners typically start at the junior analyst level and then progress to senior analyst roles. They are responsible for producing investment ideas, while the next step is portfolio management, where fund/portfolio managers make investment decisions in terms of portfolio construction, investment selection, and ongoing monitoring of existing and potential holdings. Company structures are different and some prefer to separate people management responsibilities from portfolio managers by having a Head of Research function, while others keep reporting lines to the managers. For private equity firms, the structure is typically comprised of Limited Partners (investors in the fund) and General Partners (those that manage the fund).
Apart from the investment side, investment management companies also have sales teams, which are in charge of product distribution and relationships with clients. That includes marketing and data teams that build presentations for the use of both portfolio managers and clients. Sales teams are usually managed by the Head of distribution and are split across different geographies, for example, EMEA or APAC. Local teams are headed by a dedicated manager who can use the company’s broader resources in order to supply clients with relevant materials.
To find out who the top ten largest investment management companies are, ranked according to the size of their assets under management in USD terms, noting their region of domicile and details, access the download.
Education and Skills
When it comes to education and skills, both investment banking and investment management are looking for bright individuals that can demonstrate high numerical literacy, financial curiosity, and a set of strong soft skills. While a bachelor’s degree is considered a pre-requisite for both many decide to pursue postgraduate degrees (such as Master’s in Finance or Master of Business Administration – MBA after a few years of experience in order to advance their careers.
Another way to demonstrate a higher level of competence and excel in career opportunities is by obtaining qualifications. Our online courses help participants develop a comprehensive understanding of these essential skills, whether you’re looking to advance your career or excel in interviews, explore our courses on investment banking, private equity, or portfolio management. Professional qualifications are more popular with investment managers, where qualifications like the Chartered Financial Analyst (CFA), Chartered Alternative Investment Analyst (CAIA) or Chartered Wealth Manager are highly valued.
However, both investment banking and investment management require specific skills like Financial modelling, the interpretation of financial statements, analyzing risk and performance, and having strong knowledge of market concepts. Hands-on experience with financial software is often required, depending on the role – popular data providers include Felix, Bloomberg, Morningstar, PitchBook, and Thomson Reuters. Last, but not least, communication, presentation, and writing skills are also essential, develop these skills whilst building your personal brand with our online business toolkit course.
Hours and Salary
Lifestyle and work-life balance could be quite different for investment bankers and those working in asset management. In terms of work hours, investment banks could demand from their employees anywhere between 60 to 80 hours per week, which may also include occasionally working on the weekend. In contrast, asset managers (of course depending on many factors like team resources and the current market environment) could require anywhere between 40 and 60 hours per week and almost never ask employees to work on the weekend. However, those working in hedge funds and private equity could expect to do similar hours to the investment bankers.
Compensation for both career pathways could be quite lucrative. Entry positions for investment bankers at bulge bracket banks could typically start from $90,000 with bonuses ranging (based on performance) anywhere between 50% to 100%. In asset management, new joiners could expect a starting of around $70,000 and a performance-related bonus. After a few years of experience, both careers could offer excellent pay, typically in excess of $150,000 base salary. Hedge funds and private equity companies typically offer starting salaries in the range of $80,000 – $120,000 depending on experience. Bonuses are highly dependent on the performance of the fund and may go as high as 2-3 times the basic salary. After a few years of experience, compensation in hedge funds and private equity may grow significantly higher.
Since both careers are intellectually demanding and recruit only top professionals, it is not surprising that there are quite a few exit opportunities available to them. The financial expertise acquired through working in investment banking could find application in other areas like asset management, private equity, venture capital, and hedge funds. It really depends what is the philosophy for change here – should it be a better work/life balance, asset management is the obvious choice, whereas private equity and hedge funds could offer even more lucrative packages than investment banking, but are equally demanding.
Typically, the turnover in the asset management industry is much lower due to the better balance of personal life and pay. However, those that want to make the move to private markets or hedge funds should be in quite a strong position to do so. In addition, finding a senior finance role at a company that the portfolio is invested in is not unusual as analysts build an exceptionally strong knowledge of an entity before making the case to allocate funds.
The turnover in the hedge fund industry is relatively high and that can be contributed to the success of a company – many hedge funds fail to meet their objectives and get shut down. Typical exit opportunities for hedge fund managers and/or analysts, apart from finding a role at another fund, include joining a long-only asset manager, where they could enjoy better work and life balance, sell-side equity research, venture capital, and entrepreneurship. Private equity also offers some excellent exit opportunities for those that want to perceive other careers, typically in asset management, hedge funds, venture capital, or various senior roles in finance.