In this article, we are going to have a
high-level overview of Investment banks and Investment Banking services
Let’s start by giving you an example,
go down the high street and you walk into a Santander or a Barclays or an HSBC
a retail bank, those banks are there to serve who? me and you, the average person,
the general public. So high street banks or retail banks are there to give loans
and take deposits from the average person and then you’ve got investment banks,
so investment banks are basically doing the same thing as well as a few more
things which will go into more detail on, but investment banks primarily, they
don’t serve you nor the average person on the high street, they serve companies
so large corporations, they serve governments, they serve businesses and they
serve ultra-high-net-worth or really rich individuals. So, the high street bank
serves people like me and you and the investment banks serve large companies,
governments and rich people. That’s the basic distinguishing factor between a
retail or high free bank and an investment bank.
Before we go into the different roles and
areas of an investment bank that we need to know about, you might be wondering
what’s the difference between a global investment bank and a boutique investment
bank or just an investment bank.
So, a global investment bank is an investment
bank that has lots of different divisions that offer lots of different services
as well as investment banking. So, investment banking or the investment banking
division is only one part of the front office of an investment bank and then
there are other areas like asset management, sales and trading, research,
So those come together to form a global investment
bank and then you might have a boutique investment bank or strictly an
investment bank which primarily focuses on Investment Banking.
In this article, we are going to be focusing
on global investment banks or the one’s such as Goldman Sachs, JP Morgan,
Credit Suisse, Bank of America, Merrill Lynch, Morgan Stanley and all the big
names that you come across more so than some of the other more niche or
specific corporate finance investment banking focused, boutiques, deep banks
such as Lazard, the Evercore and the more specialist investment banks. So,
we’re going to focus on the Global IB’s.
It’s important to distinguish the key features
of these banks, so the revenue-generating areas and the client-facing areas are
called the “front office”. They are the front of the firm, they meet the
clients, they see the clients, they build relationships, and the other areas
like HR, finance, accounting, technology, these are the “back-office”, they
don’t really get much client interaction, they’re not revenue-generating and
they are considered the back office. (If you want more information on the front
office versus the back office of an investment bank than do let me know below
in the comment section and do subscribe to our mailing list, just drop your
mail in the comment section or fill the contact us form to be updated with all
new articles) Going back to our informal definition, investment banks are
responsible for serving companies, corporations, governments and high net worth
What does that actually mean?
So, one thing that investment banks do is advisory,
they provide advisory services to their clients. You might be wondering, what
on earth is advisory services and what does that mean? What does it entail?
Advisory services can take many different
forms, one of which might be let’s say, a company is hoping to join or merge
with another company but it needs advice on how much it should be paying to do
so? how it should actually go about doing so? what’s the process? what legal
procedures are there?
That’s where comes Investment Banks, to advise
on this merger similarly if one company wants to take over another company,
they might go to an investment bank and ask for help on this procedure or the
best way to go about doing the takeover. The reason they go to the investment
bank is that the investment bank tends to be a specialist in these mergers and
acquisitions and so that’s one way the investment bank is providing advisory
services to its clients. Another form of advisory might be let’s say, we’ve got
Facebook, and initially, it was a private company but now it wants to be a
public company, what that means is, it can offer its shares or is equity to the
public, so, you and I can buy stocks in Facebook.
Facebook doesn’t know exactly how to go about
doing so and so it goes to an investment bank. Now the investment banking
division of an investment bank or a global investment bank will advise Facebook
on the best way to IPO, do an initial public offering (IPO) i.e. provide
Facebook shares to the general public. So,
that’s another way that you know a company or a client of a global investment
bank will receive advisory services from the bank.
In addition, let’s say we’ve got a company
like Apple and they want to raise lots of money, so that they can invest in more
research and development to create the next iPhone or the next iPad or whatever
product, that they want to create. They need to raise this money, but they
don’t know how to go about raising it, should they raise it by issuing debt? or
should they raise it by offering their shares?
And so, raising it through equity, in that
case, they would go to an investment bank and get the equity capital markets
team or the debt capital markets team to advise them on the best approach, to
take and so that’s another form of advisory services that the investment bank
is providing to a client. So, there’s many forms of advisory and this kind of
fit into the investment banking division within a global investment bank. Another
service that global investment banks provide is asset or fund management so
this is where large pension schemes or large corporations have large pools of
money and they need to invest it into the financial markets and so they go to
the asset management division of an investment bank and they give them that
money, they tell them what their risk appetite is? how long they want to invest
it? what their purpose of investment is? and so the asset management division
will charge them a fee in order to manage that money and hopefully get them the
return that they are after. They are providing asset management or investment
management services to large companies, pensions schemes, sovereign wealth
funds, and insurance companies. Similarly, another thing that they do is they
do this investing for companies and large clients but they also do it for individuals
they do it for very rich high net worth individuals.
We’re talking celebrities, very wealthy
individuals who have inherited a lot of money from their families, individuals
with lots of money, so they have the capital they need to invest in the
financial markets to preserve its value or in order for it to grow over the
long run and so an investment bank might have the private wealth management division,
which takes care of those type of duties for the clients.
Investment banks also have research divisions,
so this is where you know individuals are researching specific areas of the financial
markets, creating a lot of interesting reports and sharing that with their
clients so the clients can gain an insight into the various things, that might
be of interest to them or you know particular trends that are happening across
the financial markets, so that’s where the research division of the investment
bank comes in. Another way that an investment bank serves its clients is
through market making so I’m sure you’ve all seen the sales and trading floor
or the markets division of an investment bank.
You’ve got the traders with lots of screens, these
individuals are let’s say I’m a trader, there’s a client, let’s say Apple they
want to trade into financial security and so as a trader, I’m going to create a
market for them. They’re going to tell me what they want, I’m going to take the
money (they the buyer) and I’m going to connect them with a seller, someone who’s
selling what they’re after, create a market, they’re going to do the
transaction and I’m going to take a small fee for creating that market for
these two individuals.
So, market making on the trading floor is
basically connecting buyers and sellers and taking a fee because you have
enabled a transaction to take place which was in the interest of both parties
involved. So that’s another way investment banks or you know providing a
service to the clients and one very important thing to note with regards to a
global investment bank, they’ve got the markets division so you know the trader
who is creating a market for their clients and they’ve got the advisory
business or the investment bank now they are both privy to a lot of information
about their clients and so there are these things called a “Chinese Wall”
between them so the corporate advisory business and the markets division are
not allowed to interact with each other because these guys have lots of specific
information about their clients, so for example, Facebook when they were interested
in going public the investment bankers on this side knew a lot of information
about it, if they went and told the traders ahead of time the traders could
have easily made a lot of money from executing the right trades before the rest
of the public could do so and that’s the reason there’s a “Chinese wall”,
that’s the term for a Chinese rule, it is basically a legal wall where you are
not allowed to communicate with each other because you have access to specific secret
information that the market doesn’t have access to.
And that’s pretty much a high-level overview
of Investment banks and Investment Banking services, and how do they serve
their clients? do comment below if you want me to elaborate on any of these
things I have discussed in the article and I’ll make those topics a priority.
So that’s it for today. Thanks for reading and
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