Introduction to the sector profiles
The finance industry is complex. What does an investment banker do? What is foreign exchange? What is private banking and how does it differ from private equity? What is the difference between corporate banking and corporate finance? What sort of people work in equity trading or foreign exchange dealing? The articles that follow are designed to answer these questions. Work areas of the securities and investment industry have been divided into 19 sectors. Banks give their departments different names, but the main roles are broadly similar, and this guide will give you an understanding of what each job involves and the type of people who are best suited to it. Your starting point may well be to ask yourself some pertinent questions: What kind of skills and attributes do I have? Am I analytical and thoughtful, or an ambitious risk-taker? Look at the skill requirements in each sector and check that you would be suited to that area. These profiles will give you a clear picture of the varied roles in the financial services industry and help you prepare some informed questions for your interviewers.
Investment banking is just about mergers and acquisitions (M&A) and raising money to finance mergers and acquisitions. More broadly defined however, investment banking covers everything from buying and selling bonds, shares and other financial products, to helping clients’ raise money to finance a new factory in Baden-Württemberg, as well as everything involved in mergers and acquisitions (M&A) activity. We have opted for the broader definition. Alongside this broader spectrum of investment banking functions, it is possible to add several others that are have not traditionally been considered part of investment banking at all. For example, several banks now manage clients’ money through their own fund management arms. As many more help rich individuals cope with the tribulations of having more money than they can spend through their own private banking arms. Similarly, plenty of banks invest money directly in companies with a view to taking a hands-on role in improving their performance and selling their stake later on. They do this through their private equity arms. With the Glass-Steagall Act out of the way, a new generation of ‘universal bank’ has emerged. Universal banks offer the entire gamut of investment banking services, as well as making loans to, and taking deposits from, corporate customers.
Mergers and Acquisitions
Although the sector is commonly known as M&A, it would be more accurate to call it MA&D, or simply ‘MAD.’ As well as mergers in which two companies join together as equals, and acquisitions in which one company buys all of or part of another, M&A bankers also work on disposals, helping client companies sell the whole or part of their business.
M&A is an advisory role. M&A bankers provide advice to clients on all aspects of buying, selling, and merging with other companies. They assist with everything from suggestions about the timing of a sale or purchase, to the identity of potential buyers or sellers, and negotiating a favorable price. If a client company is subject to an unwanted takeover bid, M&A bankers will also offer advice on repelling unwanted advances.
Debt and equity capital markets
Capital markets divisions are the factory floors of investment banks. Capital markets bankers produce financial products, such as equities and bonds, for companies that want to raise money. The capital markets process begins with the originators. People working in origination have strong relationships with companies, often in a particular region or industry sector. It is their job to know when a particular company needs to raise money, and to offer it the bank’s services in issuing new shares, bonds, or related products. ‘The key role of the originator is to be a problem solver and to identify the best way of meeting a client’s objectives. The two main products issued by capital markets specialists are shares and bonds. Shares are also known as equities. Investors buy them and ‘share’ in the profits of the company through dividends, if there are any. Because equities can be sold on to other investors (in the equities markets), their original investors hope their value will rise, which it normally does if the company prospers. Unlike equities, bonds are a form of debt. Like equities, a company sells bonds to investors, in order to raise money. However, at some point in future, the company promises to pay the bond holders their money back. Because bonds can also be sold on to other investors, the bond holder who is eventually reimbursed is likely to be completely different to the one who bought the bond originally. As well as companies, governments also borrow money on the debt markets. Until the redemption date, anyone who owns a bond receives annual interest payments from the company, as thanks for lending it their money. Because these interest payments take the form of a fixed cash sum, bonds are known as fixed interest products. Similarly, the bond markets can be known as the fixed interest markets. As well as simple equities and bonds, capital markets divisions also issue more complex instruments such as equity-linked products (bonds which can be converted into equities) and derivatives. Whatever the financial product may be, once it has been originated and structured, it falls to another set of people to go about preparing for its sale to investors.
Sales, trading and research
Salespeople, traders and researchers in investment banks are primarily concerned with the so-called ‘secondary market’ in which millions of existing financial products are bought and sold on a daily basis. This compares to the ‘primary market’ in which brand new financial products are issued by companies, governments and other institutions in order to raise money.
They are the ones who actually buy and sell products on the financial markets. If they are very good, traders can usually earn more money than anyone else working in investment banking. They make snap decisions worth many millions of pounds and euros in the space of just a few seconds, and can make substantial profits in the process. As well as monitoring prices, traders also keep a close eye on world news; there are two basic types of trader: proprietary traders and flow traders. Most traders are flow traders, who buy and sell products on the financial markets on behalf of the bank’s clients. Flow traders work in close contact with the bank’s salespeople, who let them know clients’ purchasing and selling intentions. In return, flow traders tell salespeople whether a particular trade is possible at a particular price. Once a client has agreed to buy or sell a product at a price quoted to them by the salesperson, flow traders are obliged to make the trade at that price. They must therefore act quickly in case prices rise, leaving the bank to sell the products on at a loss. If traders are able to buy the product a price lower than that quoted to the client, the bank makes a profit While flow traders trade on behalf of clients, a handful of elite traders trade on behalf of the bank itself. These are the so-called ‘proprietary traders’. Their basic aim is to buy at low prices, and sell at high prices, an achievement which requires both judgment and luck. Proprietary traders can make stupendous profits; they can also make considerable losses.
While traders spend their days glued to computer screens, salespeople spend their time working the telephones. The job of a salesperson involves talking to clients from the moment the financial markets open to the moment they close (as well as several hours before and after). Clients include rich individuals, pension funds, and institutional investors. Salespeople take orders for financial products, which they then relay to the flow traders who buy the products on the financial markets.
Researchers exist largely for the benefit of salespeople. If you work in research, you will produce written reports on, for example, trends in the share prices of European lampshade manufacturers. This report will then be read by the people in sales who might then suggest investing in lampshade manufacturers to their clients. Research reports are also disseminated to clients directly, as well as being read by the bank’s traders. Researchers spend their time scouring companies’ annual results, and participating in conference calls where companies discuss anything which might influence their profitability and the prices of their shares or bonds.
Hedge funds were traditionally used by wealthy private investors, who were required to each invest a minimum of $1 million. But they have become increasingly open to money from other sources, and funds have poured into them from investors eager to make the most of high returns. Hedge funds achieve high returns by investing in products that are ‘alternative’, in the sense that they are not ordinary shares or bonds. Hedge funds might, for example, invest in futures. A bond future is an agreement to buy a particular quantity of a particular bond at a particular cost at a point in the future. It can be bought and sold, just like the bond itself, but often at a fraction of the price. Because they use futures and other similar products, hedge funds are effectively able to control large amounts of financial assets with a minimal initial investment. Most hedge funds follow a particular investment strategy. Some of the most popular are short selling, global macro funds, and event-driven strategies Global macro funds operate a strategy similar to that used by short sellers. But instead of focusing on movements in particular stocks, they focus on global trends. Event-driven hedge funds attempt to buy shares in the target company for less than the offer price. If the deal goes ahead, the fund will then sell the shares at the offer price for a profit. If the deal does not go ahead and the stock price falls, the fund risks making a loss. The risks associated with individual hedge funds have prompted the emergence of ‘funds of hedge funds’. Funds of hedge funds take money from investors and give it to several different hedge funds, thereby spreading the risk of one of them losing money.
Treasury and foreign exchange
Banks buy and sell foreign currencies on their own behalf and on behalf of their clients, which are other banks, rich individuals, companies, institutional fund managers, hedge funds and pension funds. Banks and their clients can own currency worth hundreds of millions or even billions of pounds, and stand to lose a lot if that currency drops in value. As a result, the foreign exchange markets tend to be very active.
While simple FX trading is increasingly automated, trading exotic FX derivative products remains labour intensive. Exotic FX derivatives include digital options, in which if a currency hits a pre-arranged price, the purchaser gets an all-or-nothing payout. – If the pre-arranged currency price is not met, the purchaser gets nothing at all. But even if the price is only just reached, the purchaser gets the whole payout, the same as if the price is far exceeded Foreign exchange strategists look at macroeconomic events and foreign exchange flows in order to identify trading opportunities and possible risks, such as the value of one currency falling, or ‘depreciating,’ against another. When the value of a currency rises compared to another it is known as ‘appreciation’.
Corporate banking is the name given to the different banking services which companies, known as ‘corporate,’ need for their day- to- day operations.
Relationship Managers – are the outward face of corporate banking. Corporate bankers are the winners and diners of the banking world. The traditional corporate banker is a ‘relationship manager,’ who meets company finance directors and chief executives in an effort to win, and keep, their business. There can be an overlap between corporate banking and capital markets. Bankers working in capital markets help companies raise money by issuing equities or debt. Relationship managers in corporate banks usually help clients raise money through loans. But in banks which offer both loans and capital markets services, relationship managers also bring in the expertise of capital markets bankers if necessary. As a result, relationship managers need to be very familiar with the array of financial products the bank offers. As well as issuing bonds and shares, clients may be interested in everything from syndicated loans to securitization products. In syndicated loans, large loan requests are divided between different lenders. In securitizations, bonds are sold on the back of the anticipated future returns from a particular asset or group of assets. Most relationship managers specialize in working with clients from particular industries, such as telecoms, media and technology (TMT), or pharmaceuticals. Credit analysts – they spend their time looking at companies’ balance sheets and working out whether it is a wise idea to issue loans to them, just in case they can’t pay them back Treasury / Cash managers – help companies manage their cash, because companies buy and sell goods overseas, treasury managers also help clients manage their holdings of foreign currencies to reduce the money they lose in foreign exchange fluctuations. Most treasury- related services are now offered through online portals, which allow companies to see the cash balances in all their accounts, as well as providing information on the foreign currencies they hold and to ensure they pay on time, and that they have the cash to make payments with. Corporate project financiers – work out ways to finance projects that are dependent upon the cash flows generated by that project to pay the money back. Projects that have been funded in this way include Eurodisney and the Channel Tunnel. Import and export financiers help companies pay for imports and exports, as well as arranging credit for companies with customers based overseas.
Private bankers exist to help very rich people manage their money in private; they all have one thing in common: they are rich beyond most people’s wildest dreams. Private Banks typically looks for clients with at least $1 million to invest, but many private bankers only deal with clients whose financial assets are worth more than $30 million. The latter are known as ‘ultra high net worth individuals’ (‘Ultra-HNWI’s’), and their banking needs are considerably more complex than those of most people with a salary, a mortgage, and student debts to pay. It is the role of the private banker to help these rich clients remain rich, both by avoiding risks that might reduce the value of their assets, and taking risks that might make them richer still. If there is a housing market crash or the stock markets plummet, multi-millionaires do not want to see their wealth wiped out. It is up to the private banker to help devise an investment strategy that will protect them against these risks, whilst also providing a reasonable annual rate of return. To achieve this, private bankers are turning to increasingly complex products. Financial derivative products are now an important part of the private banker’s armory, and private banks invest a growing proportion of their clients’ wealth in hedge funds.