FINANCE INDUSTRY CAREERS

  1. Advisory
  2. Commercial Banking
  3. Company-Based Finance
  4. Investment Banking
  5. Investment Management
  6. Merchant Banking
  7. Municipal Finance
  8. Research
  9. Private Placements
  10. Private Client Services
  11. Sales and Trading

Advisory

Advisory work is linked to corporate finance, mergers and acquisitions (M&A), and merchant banking. It is generally performed as part of the overall service given to clients or it may be tied to a specific transaction. Advisory or consulting work can take an infinite number of forms including capital structure analysis, comparables analysis and industry research. Much of the specific work is dependent on the particular client's industry. In addition, the past few years have seen a dramatic growth in advisory work related to corporate restructuring and reorganizations. Advisory work is performed by investment banks, commercial banks, financial consulting firms and boutiques specializing in M&A and advisory work.

Commercial Banking

A commercial bank's traditional business has been to accept deposits from and loan money to individuals and businesses. Banks earn their money on the spread between the rates that they pay on deposits and the rates they earn on loans. Increasingly, banks are favoring fee services over spreads to increase profits, as a result of increased competition to reduce these spreads. Fee businesses include: cash management, foreign exchange, mergers and acquisition advice, discount brokerage and mutual fund and life insurance sales.

There are now four basic types of US commercial banks: multi-nationals, consumer regionals, community banks and non-bank banks. Multi-national banks typically have over 10% of their assets overseas. Most major money center banks, including BankAmerica, Bankers Trust, Chase, Chemical, First Chicago are included in this group.

In 1985, a Supreme Court ruling allowed mergers among banks within regions. Some banks quickly established empires, doubling and tripling their size. Examples of aggressive banks include: Banc One, NationsBank, First Union and Fleet Financial.

In recent years, the industry has seen a shift in the focus of traditional commercial banks from traditional lending to brokerage activities. Many banks have received waivers from the requirements of the Glass-Steagal Act, which requires for the separation of banking and certain investment banking functions. Thus, these commercial banks' subsidiaries (or related companies) have been permitted to underwrite equity and fixed income securities. These subsidiaries, like their investment banking counterparts, have established relationships with corporate clients. However, one competitive advantage that commercial banks have over traditional investment banking firms is their ability to lend their own capital. Traditional investment banking firms generally have not exposed their capital in the form of loans. The commercial banks already have performed the credit analysis and often times are able to provide loans or bridge loans to assist their corporate clients with their securities issuance.

Company-Based Finance

Company-Based Finance involves a number of responsibilities, such as capital budgeting, investment allocation decisions, lease vs. buy analysis, product or promotional pricings (usually in a consumer products company), risk management, interest rate or currency hedging, and internal corporate finance positions (investment banking function which is performed in-house).

For further information, Company-Based Finance Corporations

Investment Banking

Investment Banking, as defined here, is the process of raising money in the form of equity and debt for corporate clients or public institutions. This process involves two steps: determining the funding needs of the client and finding investors to supply those funds. This second step can generally be accomplished through a public issue or a private placement. A public issuance of a security involves the investment bank acting as an underwrite of the securities, purchasing the securities from the issuer and reselling them on the public market. For larger investment banks, this process will involve other areas of the firm, such as sales and trading, research and a syndicate function (sharing the underwriting responsibility with other investment banks). A private placement, on the other hand, calls for the investment bank to act solely as an agent. The bank will match the issuer of the security with potential investors in an offering which is not made available to the public. Investment Banking professionals concentrate their efforts on identifying alternative sources of capital and on developing innovative techniques to match the interest of users and providers of capital.

The term investment bank is broadly used to describe any financial institution that provides services in the areas of securities issuance and brokerage, financial advisory or asset management. Large investment banks, such as the "bulge bracket" firms (Merrill Lynch, Morgan Stanley, Goldman Sachs and CS First Boston, to name a few) have begun to diversify their own activities by branching out into lending relations and committing additional levels of capital (eg. bridge loans)..

Investment banking generally encompasses four functions:traditional investment banking or corporate finance , mergers and acquisitions, merchant banking, advisory and financial consulting. Some firms may engage in all of these functions whereas other firms specialize in one or more areas.

For further information, Investment and Commercial Banks

Investment Management and Advisory

Investment banks are among the growing number of firms offering investment management services for which investors pay a fee based on the size of their portfolios (for example, 1% of their net asset value). As the securities markets become more volatile and complicated, it has become increasingly difficult and time-consuming for investors to monitor all financial news. These investors may not believe that the brokers are impartial; therefore, they look for management services.

For large institutional and individual accounts, asset management groups and bank trust and cash management departments handle separate portfolios or aggregate portfolios, depending on the client preference or portfolio size. Firms also manage mutual funds with small minimum investment levels.

The number of mutual funds in the past few years has ballooned. Some, such as Fidelity, have as many as 100 individual funds. Many of these management groups are division of larger financial institutions, including banks and insurance companies. A rapidly growing trend today is that some institutions also offer financial planning services to help individuals cope with the growing complexity and diversity of financial products. Financial planners include IDS Financial Services, Integrated Resources, MONY and New England Insurance. The financial planner works with clients to establish financial objectives and helps them accomplish the goals through investments, insurance, tax, retirement and estate planning.

Merchant Banking

Merchant banking allows an investment bank to act as principal in a transaction by either purchasing or selling a stake in an M&A transaction. Some firms specialize only in this field while larger investment banks have an area devoted to it. Merchant bankers work closely with the corporate finance and M&A departments.

Municipal Finance

This department is responsible for structuring and executing transactions and providing ongoing financial advisory services to issuers of municipal bonds. The issuers of municipal bonds include: states, state agencies, local governments, hospitals, health care systems, airports, public power authorities, college and universities, housing finance agencies, mass transit systems and cultural institutions. This department originates and underwrites the full spectrum of tax-exempt and taxable municipal debt, ranging from tax-exempt commercial paper, variable rate demand notes and put bonds to long-term fixed rate bonds. In addition, municipal finance has begun to become active in the derivatives market, where swaps and options are being used to manage interest rate exposure.

Research

The research department supports the sales and trading personnel by providing information about the economy, various industries, and specific companies. Individual securities analysts (in the equities area) issue regular reports about corporations based on public financial information, economic data, and conversations with management, suppliers, customers and competition. These reports usually include a recommendation to buy, sell or hold the company's stock at the current stock price. Research analysts may choose to become chartered financial analysts, which requires passing three levels of exams over a three year period. Within fixed income, researchers use and develop sophisticated analytical and mathematical models to generate new trading ideas and products to enable clients to trade, hedge and investment more effectively. Areas under fixed income research include: debt options, asset liability management, risk management, financial modeling, mortgage portfolio analysis and new product development.

Private Placements

This is the sale of securities by a corporation directly to a small group of sophisticated investors with the investment bank typically acting as a liaison. Most companies utilizing private placements (middle market companies) are smaller than those active in the public market. Because of the smaller size of the issue, the company would have to pay higher yield than its credit rating warrants in order to stimulate sufficient secondary market interest. The existence of a private placement market offers the corporation a lower-cost alternative source of funds. The main purchasers of private placements are life insurance companies like Prudential and Metropolitan. Since they have large amounts of funds to invest each year and a fairly steady cash flow, they are willing to purchase a less liquid investment in return for higher yields.

The investment bankers role in a private placement is that of advisor to the issuing corporation. Unlike underwriting, the investment banker does not assume ownership of the security and therefore does not bear the market risk. The fee for this advisory service is negotiated and is generally a function of the size and complexity of the issue and the credit rating of the client. The banker typically follows six steps in the private placement process:

  1. Investigation and analysis of the client corporation and its industry
  2. Structuring financing and preparing offering memorandum
  3. Presentation of recommendations to client
  4. Developing marketing plan to sell deal to investors
  5. Contacting potential investors (life insurance companies, pension funds)
  6. Documentation and transfer of funds

In addition to investment bankers originating the business, the investors have begun to market their services directly. For example, insurance companies actively seek places in which to invest their money and in the process eliminate the investment banker's role. As investors, the life insurance companies are taking a stake in the future of the company and therefore perform vigorous credit and financial analysis to ensure that the issuer will be able to pay back their obligation in 5, 10 or 20 years, depending on the length of the issue. As a "buy-side" participant in the transaction, life insurance companies have the following investment process:

Career opportunities in private placements exist on both the sell-side and buy-side of the transaction as either the investment banker or the institutional investor, respectively.

Private Client Services

This area, found in most large investment banks, provides comprehensive financial services to high net worth individuals or smaller companies. The services include equity and fixed income products, as well as cash management services. In addition, custody, safekeeping, margin lending and asset management are services provided. The account representative for PCS is responsible for advising his/her clients on the full product range offered by the investment bank.

Sales and Trading

Sales and trading departments interact with buyers and sellers of securities. Salespeople may either service institutional customers (pension funds, insurance companies, money managers) or retail customers (individuals and small institutions).

Retail salespeople, often referred to as brokers or registered representatives, may sell insurance, money market accounts, IRA services and municipal bonds. Institutional salespeople generally specialize in a financial product or group of related financial products, such as equities, high-yield bonds, and foreign exchange products.

Traders are responsible for making markets in given securities by buying and selling these securities. Traders can either be trading to service a customer (e.g. the customer wants to sell a security, so the trader will communicate a price at which he/she will purchase the security) or be trading on a proprietary basis (e.g. the trader has an opinion that a given stock will increase in value, so he/she purchases the stock and holds it in his/her inventory). Though both traders are risking the firm's capital, the proprietary trader is not servicing the client in any way versus the use of capital.

Generally speaking, the sales and trading personnel must pass a National Association of Securities Dealers ("NASD") Series 7 examination in order to become registered to sell securities. The exam tests general securities knowledge. In order to take the six-hour exam, one must be sponsored by a NASD firm, usually an employer. Principals of NASD firms must also pass the Series 7 and Series 24 exams. Other exams required for specific products are the Series 6 for mutual fund employee and Series 52 for municipal bonds.

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