Investment Banks - Explained | What are different Investment Banking services?

Investment banks and Investment Banking services [Explained]


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, 


When you 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, private banking.

 

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 individuals.

 

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 do comment your email id below in the comment box, so that we can add you in our subscriber's list and you will be updated whenever we publish our next article.

 

Check out our popular article: 

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Till then, Take care!

 

The Finance Magic.

Let's spread financial literacy!

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