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
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.
Trading
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.
Sales
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.
Research
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.
Alternative investments
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
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 banking
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.
Fund management
Fund managers have an array of different options available
to them. They might invest in everything from shares,
bonds, and real estate, to commodities, such as oil,
wheat and aluminum. Different clients are usually
prepared to tolerate different amounts of risk in
pursuit of growth, so fund management companies usually
run several different funds at a time. Some offer
fast growth but big risks; others offer slower growth
and smaller risks. Hedge funds, which invest in financial
derivative products, attempt to offer fast growth
and minimal risks, not always with success. Traditionally,
a job as a fund manager involved analyzing and identifying
products to invest in, persuading new clients to put
money into the fund, and reassuring existing clients
that their investment was on track for long term growth,
despite short term hiccups. Nowadays however, fund
management companies are usually large and complex
organizations in which the role of fund manager has
been split into several sub- roles. Analysts working
in fund management help steer fund managers in the
right direction when it comes to choosing which assets
to invest in. Like fund managers themselves, they
usually specialize in a particular asset class or
industry area. To help ascertain which stocks, bonds,
or commodities are best, analysts scrutinize companies'
financial reports and meet with companies' senior
management to discuss strategy. They then write about
their conclusions in an effort to impart their findings
to fund managers.
Investment consulting
Investment consultants advise pension fund trustees
on what to do with their money. They help trustees
decide which mix of assets to invest in, and which
fund managers to put their money with. In the process,
they look at how fund managers have performed in the
past and try to predict how they will perform in the
future, bearing in mind that outstanding returns over
the past decade are no guarantee that the same fund
will not halve in value in the years to come.
Global custody
Before computers became widespread, global custodians
had huge filing systems in which they stored certificates
of ownership of shares, bonds, warrants and derivatives
for their clients. Today however, certificates related
to asset ownership are stored electronically, making
the business of custody considerably less space intensive.
At the same time, the role of custodians has broadened
to include a wide range of other services. Custodians
are no longer merely huge safe deposit boxes. They
also offer their clients services such as: income
collection (collecting income such as dividends from
clients' investments), performance measurement (calculating
the returns clients' investments have made over a
period of time. Custodians are also involves in more
complex tasks, such a transition management, the process
in which clients' assets are shifted en-masse from
one investment strategy, or one custodian to another.
Custodians also help clients value their portfolios.
Alongside relationship managers, custodians typically
employ pricing and valuation experts whose role it
is to work out the value of infrequently traded assets.
Custodians also employ securities lending specialists
who lend particular financial products to their clients
in return for a fee when a client needs a stock that
it cannot access immediately.
Risk management
There are several different kinds of risk and therefore
several different kinds of risk management. For a
financial institution, one of the most important kinds
of risk is 'market risk.' Market risk is the risk
that an investment portfolio will fall in value due
to an outside event that causes the price of a whole
class of traded products, be it stocks, bonds, or
commodities, to fall simultaneously. Because it affects
an entire class of products and does not, for example,
refer to the risk of one stock falling compared to
another, market risk is also called 'systemic risk'.
Rising oil prices, earthquakes, sudden hikes in interest
rates and wars are examples of systemic risks: they
can affect the prices of whole classes of financial
products and can be difficult to avoid, not matter
how diverse the investment portfolio. People who work
in market risk are typically situated on, or close
to, the trading floor. They spend a lot of their time
looking at worst case scenarios and analyzing how
they might impact the bank. Another area of risk management
is 'operational risk'. These are all the risks that
something might go wrong in the day-to-day running
of the bank. Operational risk covers everything from
terrorist attacks, to computer failures, hurricanes,
fraudulent employees, and ineptly executed redundancy
programmers which leave no one to do crucial jobs.
Other kinds of risk include: country risk, or the
risk that economic or political instability will cause
borrowers (including governments) in a particular
country to default on their obligations; legal risk,
or the risk that a document cannot be enforced due
to insufficient documentation, or insufficient authority
from the counterparty; and liquidity risk, when not
enough people are buying and selling for financial
markets to function properly.
Compliance
The compliance department performs several related
tasks. First, it interprets the complicated and ever-changing
external rules laid down by the regulators. Next,
it creates a system of internal rules that encourage
staff within the bank to act in accordance with the
regulations. It then communicates the internal rules
to the bank's employees and checks to make sure they
do what they're supposed to being doing. And if one
of these rules is breached, it provides so-called
'escalation routes,' or pre-arranged methods of ensuring
that incidents of rule-breaking are brought to its
attention. Because large investment banks are complex
organizations, the compliance division is usually
split into teams responsible for different aspects
of this broader purpose. These include: money laundering
specialists; training specialists; monitoring specialists;
and advisory and product specialists. Money laundering'
is used to describe the introduction of illegally
gained assets into the legal financial system with
the intention of covering up their dubious origin.
The role of the training specialists is to preach
the compliance message to everyone who works in the
bank.
Monitoring is a relatively simple role involving lots
of administrative work. Monitoring specialists’ role
is to look out for other infringements of the rules
and regulations that keep the bank operating legitimately.
Operations
'Operations' is a wide ranging term that covers everything
from IT, to Human Resources, Accounting (finance),
and Risk management. Its functions are so broad that
operations specialists typically specialize in only
one of these areas. At its centre, is the core function
of clearing and settling trades.
Also known as 'back office staff', they earn less
money and lead a less glamorous existence than the
highly paid corporate financiers, salespeople and
traders, who inhabit the so-called 'front office'.
People who work in clearing and settlements do the
administrative work generated by a busy trading floor.
Clearing trades is a question of looking at the records
made by the bank's traders when they buy and sell
shares or other financial products, and checking that
they match the records kept by people who the shares
were bought from or sold to (the 'counterparties').
IT and e-commerce
Jobs in IT departments of investment banks tend to
fall into one of four categories: development, business
analysis, project management, and technical support.
IT developer, responsible for writing the computer
programmers that help the bank do everything from
pricing and booking trades, to calculating risk. The
programming languages used by banks are usually C;
Java and Microsoft's .NET ('dot net'). While developers
write the programmes, business analysts look at the
way technology is used in the bank, and analyze the
opportunities for making it work better. Business
analysts help identify the potential for making changes
to a bank's technology systems. Another breed of banking
IT staff work on technical support desks. These are
the docile types who can solve complex problems while
being shouted at by irate bankers whose computers
don't work.
Marketing and PR
'Marketing' refers to all the activities that underpin
the activity of selling goods and services. It is
up to people in the marketing department to find out
about the needs of customers and potential customers.
Once they know what customers want, marketing specialists
design, price, and promote products and services to
match customers' requirements. Investment banks typically
employ centrally-focused marketing staff to help sell
the bank as a whole. Central marketing staffs work
on the overall branding of the bank, helping to put
together publicity campaigns to create the right image
of the company in the world at large. This can involve
organizing events or sponsoring sports tournaments,
as well as producing brochures and developing corporate
logos. Marketing jobs are also found throughout the
financial services industry. Marketing staff also
work alongside sales staff in specific investment
banking product areas, such as equities and fixed
income. Product-focused marketing staff help develop
products to match clients' needs. Fund management
firms employ marketing staff to liaise with clients
and come up with ideas for new kinds of investment
funds.
While people in marketing are communicating with customers
and potential customers, people in PR communicate
with the media. They spend their time encouraging
journalists to write nice things about the company
they work for.
Legal
Banks are large and complex organizations, and most
of their activities have legal implications. It is
up to the legal department to ensure that all the
contracts signed by the bank and its clients are right
and proper, that laws are not broken, and that in
the event of a dispute, the bank does not come out
too badly off. Many of the lawyers working in investment
banks specialize in a particular area of the bank's
business. As a banking lawyer, you might, for example,
specialize in the legal complexities of merger and
acquisition (M&A) deals. Alternatively, you could
find yourself working on the trading floor, or with
the capital markets teams. Usually a team of lawyers
also works in a central legal office, dealing with
issues such as discrimination claims and major litigation.
Human Resources
The mantra of the HR profession is: 'People are an
organization’s main resource'. Unfortunately, the
industry has a reputation for hiring lots of people
when times are good and making lots of them redundant
when times are bad. Jobs in HR usually fit into one
of five categories: employee relations, recruitment,
compensation and benefits, training and development,
and generalist work. HR generalists, who know something
about all areas, are usually assigned to each banking
division. These experienced staff work with front-office
bankers on strategic matters such as reward policies
and staff retention.
