Tuesday, September 22, 2009

Which way--investment or private banking?

Students and finance professionals often grapple with tough decisions about what's next in their careers. One common decision: In which direction do I go, private banking or corporate/investment banking? Many Consortium alumni and students in finance confront this question every year.

Private banking (PB) encompasses an array of services for high net-worth individuals. That might mean personal banking, but might also entail sophisticated services: currency hedging, asset disposition, tax advice, portfolio management, and mergers and acquisitions on a smaller scall.

Investment banking/corporate banking (IB) provides services, advice and products to large corporations around the world. That, too, might mean basic corporate banking, but might entail complex debt or equity financings, takeover defense, project finance, convertible-bond offerings, or equity share repurchases.

But sometimes the two intersect. The owner of a thriving, growing private company decides to go public. Private bankers and investment bankers will be involved--to advise the company on its IPO and to advise the owner and other shareholders how to manage its ownership of new public shares or newfound wealth.

Students and other finance professionals in transition will knock their heads evaluating which direction to lean. Some have asked whether it's possible to transition from one to the other--whether investment bankers can become private bankers, and vice versa. Recently some CFN members reviewed factors that can help people decide what's best for them. Some are summarized below.

Private Banking (or "private wealth management")

Important factors to consider:

1. You'll establish close relationships with clients who are senior industry leaders or established entrepreneurs (who might seek you to join them in the long term one day). You'll be valued for the important contacts you've made and the long-term relationship you maintain.

2. Wealth management is a targeted growth area in many big firms, especially those which seek to avoid the erratic revenue streams from trading and investment banking.

3. Wealth management, among other objectives, focuses on accumulating assets and generating stable fees from those assets. By design, banks manage the business to be less cyclical and less susceptible to economic downturns.

4. You will learn and become exposured to a large number of banking products and services (from estate planning to private-equity investing, from portfolio management to funds transfer and securities custody.

5. There is often flexibility in moving from private banking to other banking units or other companies, because of that product/service exposure.

6. If you are good and stand out among others, will there be opportunities and encouragement to advance rapidly? Or would you be stifled by a "wait your turn" approach to advancement?

Investment banking/corporate banking

1. There is continued emphasis on innovation, new products, and novel financial techniques (many of which evolve and mature over time, many of which are eventually "shared" with private banking clients).

2. When deal flow peaks, the environment is intellectually challenging, adrenaline-building, and stimulating. When deal flow dwindles, the same day-to-day challenges can appear as "busy work" or "going through motions."

3. The learning curve accelerates, even for experienced, senior bankers. Banks differentiate themselves by offering something new, something that can boost shareholder value substantially, or something that can radically change the corporate face or product set of a client.
4. Those who are designated as "stars" are allowed to advance rapidly and get paid well.

5. The business is cyclical, no matter how much firms have tried to stabilize it by offering counter-cyclical services (restructuring advice, e.g.). In downturns, dismissals are rapid and sometimes rash.

6. Heretofore, the compensation pie has been large. (Time will tell whether that will continue, or continue at levels in recent years.) That pie must be divided among all those who contributed to and participated in deals. And often, that division process is undermined by anxiety and internal politics.

7. Teams are responsible for doing deals or managing corporate relationships. Subjectivity sometimes decides who plays the most important role, although in recent years banks have tried to implement objective, quantifiable methods to assess the importance of your contribution.
Yet in the end, subjectivity will influence how you are evaluated and appraised (and paid).

Investment and private bankers at large firms often work together. An older entrepreneur wants to retire and sell his/her firm. A wealthy investor wants to purchase a large stake in a blue chip company. The senior management of a large corporate client wants to understand the impact of a merger on its top leaders' wealth. These situations bring investment and private bankers together to advise the client.

It's not unusual for investment bankers to transition into private banking. It's rare, but private bankers sometimes transfer into investment banking, especially if they bring deep, rich relationships with important people within an industry.

For younger finance professionals, which way to go? Both will require special financial skills and a thorough knowledge of finance. Both will involve extensive client contact. Weigh the factors carefully, while being mindful of your own objectives. And keep an open eye.

Tracy Williams

1 comment:

  1. You always do a great job of explaining things.

    I can definitely see where you're coming from and I appreciate
    the insight. I shared this on Facebook and my friends seemed to enjoy it too.
    Keep it up!