Myth Busters - Investment Banking

Now that you know what investment banking is all about, this post will tell you what investment banking is not about. I have heard of so many “definitions” of investment banking while talking to people in India, that I felt a separate post was necessary just to dispel some myths about this world.

1)      BO at BB is not IB:

So you have a friend who works at the Indian arm of JP Morgan, one of the biggest investment banks in the world. Oh, he’s a CA too? And he works in the Finance department? That means he must be working in investment banking, right? Right?

Wrong. Believe it or not, over 95% of young CA’s who you think are working in investment banking are actually working in what is called the back office (BO). And yes, it’s exactly as “prestigious” as it sounds. Don’t get me wrong, working at a bulge bracket (BB) bank like JP Morgan in India is a hugely prestigious thing in itself. But when compared to actually working in IB, i.e. front office (FO), it’s peanuts.

“But, but, but... They work in the Finance department! What do they do if not IBanking?” you might ask. Well, they provide support to the FO by supplying analytical reports on revenues, AUM, projections, P&L analysis, etc. It does not even remotely involve any kind of financial modeling – the bread and butter of IB analysts; and the experience you gain at a BB back office will not improve your chances of getting into the FO. Keep that in mind the next time you get an interview call letter for working in Finance Control department.

Other BO operations sometimes mistaken as FO are market and credit risk analysis, treasury management and strategic services. Some learned individuals may argue that one or more of these areas fall under middle office (MO) operations. However, I’m including them all under BO for the simple reason that it is equally difficult to break into FO from every one of them.

2)      Portfolio Managers:

In my earlier post, I had mentioned that Sales and Trading (ST) and Asset Management (AM) fall under investment banking. And now I say portfolio managers are not IB? Have I totally lost it?

Well, not quite. The thing is, you need a license from the government to be called an “investment bank”. And this license has been incredibly difficult to obtain till now (rules have recently been eased in India). Thus there are many organizations which carry on activities similar to an investment bank, but still cannot be called so.

So what are the implications? It means that organizations like Angel Broking, Motilal Oswal, etc. do not fall under IB, but are simply brokers who also provide asset management services.

It is also worth pointing out here that when someone refers to "working in IB", they're generally referring to only the IB division of the bank. Those working in S&T and AM divisions are generally called "Traders" and "Asset/Portfolio Managers" respectively; while those in IBD are simply referred to as "bankers".

3)      Financial Consultants:

I’m including this one simply because it is very similar to the above point. There are numerous consultancy organizations that do provide advice on how to raise funds, optimum funding structure, etc. Note that investment banks also provide these very services. But due to lack of an IB license, consultants cannot actually help their clients raise the fund, while an investment bank does.

4)      Stock Traders:

This is one of the sillier, but still somewhat understandable misconceptions. People hear “Investment” Banking and simply assume that it’s a fancy name for gambling on the stock market. Obviously, it’s a far stretch from the truth. Investment bankers don’t gamble in shares, they gamble in companies. And oh, the amounts involved in IBanking generally make people ask, “And how many zeroes are in that?”

 
So these are all the misconceptions that I can remember at this time. If you have heard of any others from your friends, let me know and I will add it here for the benefit of others. Conversely, if you have any confusions, just comment below and I’ll try to clear things up the best I can.