Investment Banking Overview: Hierarchy, Career, and Application Guide (2024)

2. Investment Banking vs. Commercial Banking

The key difference is that investment banking refers to a financial institution, dealing with capital raising and strategic transaction advisory services for companies, while commercial banking acts as a depository, with its primary functions providing business loans and offering capabilities to handle financial concerns of both individuals and companies.

In other words, investment banks do not directly lend to or invest capital in companies.

In terms of customers, investment banks tend to deal with larger and more sophisticated organizations, while commercial banks serve individual customers and medium to large businesses.

Investment banks work on complex funding needs, helping corporations with issuance of bonds and stocks, the purchase and sales of bonds and stocks, and mergers and acquisitions. Commercial banks, by contrast, help their clients with checking and savings accounts, mortgage, loans, treasury management, foreign currency exchange and retirement plan service.

3. How Do Investment Banks Work?

Just as how a big corporation is structured, an investment bank is also organized with front office, middle office and back office. The front office adds the most value to the bank, while the middle and back office are supporting divisions that make the bank’s operation smooth.

For a more comprehensive look, an investment bank’s structure is outlined in our infographic below.

3.1. Front Office

An investment bank’s front office comprises mainly 4 divisions including Investment Banking or Corporate Finance (IBD), , Equity Research (ER) or Research, and Asset Management (AM). The number of divisions varies depending on how a bank splits up their services. But these four main divisions are what most full-fledged investment banks have.

Of all roles, front-office roles pay the highest salaries, and offer the best career options and progression since they are responsible for generating revenue for the firm. As a counterpart of high salaries and healthy bonuses, these roles only aim for high-achieving and top-class candidates.

#1. Investment Banking (or Corporate Finance – IBD)

The investment banking division (IBD) is split up into either Product Groups or Industry Groups. While the Product Groups focus on performing specific deal types such as mergers and acquisitions, equity or debt issuance, derivative transactions, and work across various industries, the Industry Groups specialize in a particular industry but work on many deal types for just the industry it serves.

• Product Groups, as said, are further divided into smaller groups including: Mergers & Acquisitions (M&A), Capital Market (Equity and Debt Capital Market), Leverage Finance, Restructuring.
• Industry Groups consist of many industries including: Healthcare, Real Estate, Infrastructure, Public Finance, Media & Telecommunication, Digital Media, Technology, Industrials, Power & Utilities, Renewable Energy, Chemicals, Metals & Mining, Oil & Gas, Transportation, Maritime & Shipping, Sports.

#2. Sales & Trading (S&T)

, as the name suggests, has the sales side, and the trading side. This division collaborates closely with the investment banking division to advise clients on trading securities and distributing securities to potential investors. Its clients are mostly institutional investors, for example, hedge funds and asset management firms.

• Salespeople build relationships with clients and pitch ideas to them.
• Trading people, meanwhile, make the market and execute the orders for clients.

Based on the products they work on, Sales & Trading division is further divided into Equity and Fixed Income.

• Equity Group is responsible for stocks and derivatives.
• Fixed Income Group is responsible for all types of bonds, CDS, FX, and commodities.

In essence, Sales & Trading is more of matchmakers, matching promising buyers such as investment funds with companies issuing stocks and bonds, for the sake of simplicity.

#3. Equity Research (or Research – ER)

Equity Research analyzes companies, speaks with management investors, and makes buy, sell, and hold recommendations on the stocks and bonds. People like to call it Equity Research, but it writes reports on both Equity and Fixed Income. In investment banks, the research expertise comes from this division.

Other divisions in investment banks are not solely clients of the Research Division. It also serves external clients, who need their comprehensive analysis, at a fee.

Turning back the clock to a few decades ago, investment banks “manipulated” the stock market for their profits thanks to this division. For higher commissions, a bank often encouraged the trading of their favourable stocks. Once their “one-sided” reports were published, these could drive the trading in their favor.

But now the landscape has changed with many regulations to come, this type of manipulation still exists but no longer influences the market as it used to before.

#4. Asset Management

Asset Management in investment banks manages the investment on investors’ behalf by investing in stocks, fixed-income securities, derivatives investments, and other types of investment. It also provides investment products to institutional and individual investors. The division varies from firm to firm. Some banks do not include this division in their front office.

The existence of this division seemingly violates the conflict of interests because banks offer both advice and direct investment in the company they serve . That explains why many regulations were introduced to prevent investment banks from acting dependently and to force them to avoid any conflict in their operations, which can affect clients’ interests.

3.2. Middle Office and Back Office

Middle office and back office are supporting functions of an investment bank. Middle office supports revenue-related processes and includes risk management, treasury, and financial control. Back office, meanwhile, refers to compliance, information technology, accounting, and human resources. Irrespective of how the firm performs, the back office is an indispensable part of an investment bank.

These divisions are very important in the operation of an investment bank. Though not directly bringing in huge revenues for the firm, they help front-office divisions not only work smoothly but also allow deals and transactions to be executed correctly and successfully.

These supporting divisions also provide internships and full-time roles for students. If you want a more comfortable workload and a work-life balance, you can go for these roles. But the salaries will not be as high as the front-office.

The internal transfer between front office, middle office and back office still happens but is not common since the natures of work are quite different. Skills at middle office and back office are not applicable for front-office roles. You still can recruit for these roles in the early years of your university, such as internships.

However, if your pursuit is front office, internships at middle office and back office might not help you that much.

Let’s watch the video below, which gives you a detailed description of what investment banking is and how a bank is structured.

4. Top Investment Banking Firms

Most prestigious investment banks are Goldman Sachs, J.P. Morgan, Morgan Stanley, Bank of America Merrill Lynch, Citigroup, Credit Suisse, UBS, Deutsche Bank, and Barclay. These largest full-service investment banks are often called bulge brackets.

The prestige of an investment bank is measured by size of the firm, size of deals, current standing, industry coverage, and region.

A grand-tier investment bank can be famous in the US, but less-known in some regions in Europe.

In a nutshell, investment banks are categorized into four groups: bulge bracket investment banks, elite boutique investment banking. middle market investment banks, and regional and industrial boutique investment banks.

Elite boutique banks, a subset of boutique investment banks, are also top-tier 1. Despite only focusing on specific areas, elite boutiques tend to advise on large deals like bulge brackets.

To learn more about each type of bank, check out these articles:

• Bulge bracket investment banks
• Middle market banks
• Elite boutique banks
• Industrial boutique and regional boutique banks

As of August 2021, according to Vault, the top 10 investment banks are as follows (the list will be updated constantly):

#1. Goldman Sachs

#2. Morgan Stanley

#3. J.P. Morgan

#4. Evercore

#5. Centerview Partners

#6. Lazard

#7. Moelis & Companies

#8. PJT Partners

#9. Bank of America

#10. Credit Suisse

Half of the list are globally recognizable bulge brackets, while the rest are elite boutique investment banks. Despite a less global presence and recognition, these elite boutique banks usually advise on deals worth as much as bulge bracket’s ones, and the salaries are sometimes higher than that of bulge brackets. This will be discussed later.

5. Investment Banking Career Paths

In terms of the career path, an investment banker starts off their career as an analyst, then it takes two to three years to move up to associate, to vice president, to senior vice president, and to managing director. Not everyone gets into as an analyst, MBA students or experienced professionals can start working at banks from the associate level.

Below the analyst level is summer analyst. Summer analyst program refers to an internship lasting from 8 to 10 weeks held annually by investment banks. This is the main feeder for full-time analysts a year later, usually starting working full-time after they finish the senior year.

Along with the summer analyst program exclusively designed for undergraduates, investment banks have the summer associate programs for which MBA students in the penultimate year can apply.

6. Investment Banking Salaries and Compensations

6.1. A first-year analyst earns up to $100K annual base pay

On average, a first-year investment banking analyst earns around $100,000 before bonus, while a first-year investment banking associate brings in up to $150,000 in base pay. Vice presidents typically get paid $200,000 – $300,000. Receiving the highest is the managing director, who makes anywhere from $600,000 to several million dollars, largely depending on his/her performance.

6.2. The total compensation is an aggregate of base pay and bonus

Your salary will rise quickly as you move up the career ladder. The total compensation is made of two parts: base salary and bonus. The main part that makes bankers’ salaries attractive lies in bonuses, including stub bonus, end-of-year cash bonus, stock-based/deferred bonus, and signup bonus.

If you want to learn more about how much these bonuses are, and how they are paid and made of, reference our Investment Banking Salary article.

The compensation depends greatly on both your performance and your team’s performance. Overall market conditions could make your compensation suffer anyway.

6.3. Elite boutiques often pay the highest salaries to employees

Put aside all other things, elite boutique banks are more favored in terms of salary and bonus payment. They tend to pay slightly higher than bulge brackets and pay the total bonus in cash. bulge brackets, meanwhile, will defer a large portion of your bonus for a certain period of time or pay the bonus in stock.

If you want the bonus in 100% cash, you can go for privately held elite boutique investment banks. Bulge brackets are publicly traded firms, using stocks partially for regulatory reasons and partially to incentivize you to stay longer at the firm.

6.4. A table to sum up how much a banker gets paid

Here’s how the salary progresses as you move up the corporate ladder, for reference purpose only:

8. How to Get into Investment Banking

To learn more about how to break into investment banking, reference our article.

• How to get into Investment Banking

8.1. Look for programs that fit your backgrounds

There are four main programs that investment banks open to hire new bankers:

• Summer analyst program
• Full-time analyst program
• Summer associate program
• Full-time associate program

These programs are conducted on an annual basis. Additionally, there will be other programs introduced on a need basis, only recruiting higher levels such as vice president, senior vice president or managing director for the bank.

Of all the four, summer analyst and summer associate programs are internships, lasting 8 to 10 weeks. Interns are involved in real deals alongside current bankers to learn about the work. The internship programs target students in the penultimate years of study. If interns perform well, they will be given a full-time offer starting working a year later upon graduation.

For those who happen to be late for internships, are not successful in landing an internship, or cannot convert the internship into a full-time offer, they can apply for full-time analyst and full-time associate programs. Note that the full-time programs will be very competitive due to limited slots offered.

8.2. Build a perfect investment banking resume

A perfect resume must demonstrate your history of excellence, relevant experience and interests in finance.

If you want to learn how to craft your own investment banking resume, check out our articles for more:

• Guide to a stellar investment banking resume
• What do investment bankers look for in a resume?

We introduce the Investment Banking Resume Toolkit aimed at helping you make a perfect resume following 4 steps below:

8.3. Expand your networks with current banking professionals

A common mistake that many networking seekers usually make is that they reach out to current investment bankers when they have no relevant experience under their belts. You still can connect with them, but it will be better if you have detailed plans for your next steps and you are looking for advice from them. You shouldn’t show up without anything to demonstrate your interests in finance.

Successful candidates often apply networking strategies as follows:

• Cold calling
• Cold emailing
• Informational interview
• Connect via LinkedIn or the alma mater’s alumni community

For further reading about networking, check out these articles:

• Investment banking networking
• Informational interview

Networking can be painful. A successful candidate has to make a hundred cold calls and cold emails, with most of them leading to nowhere, until the banker calls or emails back. Networking can give you a big advantage in going to an interview and winning an offer at a bank.

However, networking and application should be separated and conducted parallelly. Though networking can give you an edge, there’s no guarantee that you will definitely get an offer.

You still need to submit your applications with the banks without delay. Most banks conduct their recruiting process on a first-come, first-serve basis until all vacancies are filled. Depending heavily on networking and applying late can decrease your chance of getting into investment banking.

6.4. Prepare to ace rounds of interview

In most cases, you have to get through 2 interview rounds until you get an offer. The first round is the HireVue interview, and the second round is the Superday.

• HireVue is a video-based interview where you answer interview questions in front of the camera within the required timeframe. Most questions are non-technical and fit questions. So be professional and articulate.
• Superday includes 5 to 10 interviews with interviewers being bankers from all levels. The types of questions range from fit to technical ones.

The interview process differs in Europe and Asia. The first round is the Competency Test, and the second round is the Assessment Center.

• Competency test requires you to answer fit questions in a written version. Any minor mistake can prevent you from advancing to the next round.
• Assessment Center is a group case study, where you work in a group and present your group’s outcome in front of the jury panel. It doesn’t last as long as the superday, so the intensity is far less.