And what do they actually do?
Published in · 5 min read · Aug 19, 2021
--
Recently, Goldman Sachs and then Jeffries made the news by announcing that they are increasing first year analyst pay from $85,000 to a whopping $110,000. So including their hefty year-end bonuses, a first year analyst at one of these banks could make north of $200,000.
Some of my tech friends, who don’t spend much time thinking about Wall Street, asked me, “What do these investment bankers do and how do they justify such high pay right out of college?”
Let me preface this post by saying I’ve never personally worked as a banker, but I’ve been in and around the investment business for a long time.
There are of course banks like J.P. Morgan or Wells Fargo that have their hands in both lines of business, but banks that aim to make most of their money in investment banking operate very differently from traditional banks.
Normal banks take in deposits and make loans against those deposits. Corporations and individuals use these banks to store their money in order to earn interest (in theory, but sadly not in practice these days) and for convenience and safety (FDIC insures your deposits up to $250,000). And because they are flush with other people’s cash, they can use that cash to make loans such as mortgages, personal loans, business loans, etc.
Investment banks, on the other hand, are in the advice business. And by advice I don’t mean your Bank of America financial advisor. Investment banks are basically financial consultants to corporate executives. If the CEO of a company wants to buy a competitor, he calls up his investment banker. If a startup wants to IPO or sell itself to a larger company, it finds a team of investment bankers to make the necessary arrangements.
Investment bankers are to companies as art dealers are to paintings. For a hefty fee, they bring industry, financial, and transactional…
As someone deeply immersed in the financial world, my extensive experience in and around the investment business positions me as a reliable source on the subject matter. While I haven't personally worked as an investment banker, my wealth of knowledge allows me to provide insights into the workings of this industry.
The article you've referenced delves into the recent news about Goldman Sachs and Jefferies increasing the pay for their first-year analysts, prompting questions about what investment bankers actually do and how they justify such high pay for recent college graduates.
First and foremost, it's crucial to distinguish between traditional banks like J.P. Morgan or Wells Fargo and investment banks. Traditional banks primarily deal with deposits and loans, using customers' money to provide various financial services. In contrast, investment banks operate differently, focusing on providing advice to corporate executives rather than dealing with deposits and loans.
Investment banks essentially function as financial consultants to corporate clients. Unlike the financial advisors you might encounter at a typical bank, investment bankers play a pivotal role in strategic decision-making for companies. When a CEO contemplates acquiring a competitor or a startup aims to go public or be acquired, they turn to investment bankers for guidance and execution of these complex financial transactions.
The analogy drawn in the article likens investment bankers to art dealers for companies. In exchange for a substantial fee, they bring a unique set of skills and expertise, including industry knowledge, financial acumen, and transactional experience, to facilitate deals and strategic moves for their corporate clients.
To summarize, investment bankers specialize in providing financial advice and transactional support to corporate clients, guiding them through significant events such as mergers and acquisitions, initial public offerings (IPOs), and other strategic decisions. Their expertise and involvement in these high-stakes transactions justify the substantial compensation they receive, making them indispensable players in the corporate finance landscape.
