Corporate finance and investment banking are among the most promising career choices for finance students. Both of these areas offer highly competitive job roles and excellent prospects to grow as a professional. Here, we would attempt to study the nature of work, compensation, work-life balance and other aspects and draw a comparison between these two careers. For sake of clarity, we would first need to broadly define corporate finance and investment banking.
1) Investment Banking Video Training 99 Course Bundle, 500+ hours
2) Business and Financial Modeling (University of Pennysylvania)
3) Wharton Business and Financial Modeling Capstone (University of Pennysylvania)
4) Introduction to Finance: Valuation and Investing (University of Michigan)
5) Valuing Projects and Companies (University of Michigan)
#1 – Conceptual Differences
Corporate finance is basically concerned with the financial activities of a company. Any decisions for investments or for raising capital fall within its domain. The fundamental objective is to maximize the value of a business by making strategic financial decisions which might include allocation of resources, identifying avenues for reinvesting profits or raising capital by issuing equity or debt securities. It must be understood that corporate finance is much broader in scope and investment banking can be defined as more of a sub-area of corporate finance.
It deals with major financing activities including issue of securities, acquiring other businesses (M&A activity) and similar functionalities aimed at raising capital for a business. Investment bankers are typically hired by big corporations to facilitate these significant fundraising activities, which demand specialized approach and expert knowledge on part of the professionals. This is why, despite technically being a sub-domain of corporate finance, investment banking qualifies as a distinct field in its own right and recognized as investment bankers are recognized as heavyweights for the kind of roles they carry out.
#2 – Corporate Finance vs Investment Banking – Pre-requisites
Undergraduates in economics, business and finance could plan for a career in corporate finance. Since most corporate finance job roles require an expert knowledge of accounting, those who have completed an accounting course could be at a distinct advantage. However, corporate finance is broader in scope than most other work areas in finance and it follow logically, that depending on the nature of work for a specific position, candidates might need to possess varying skill sets. For instance, Earning CPA (Chartered Public Accountant) designation could work best for accounting-oriented roles and those aiming for financial analyst role could benefit more with CFA (Chartered Financial Analyst) designation. It must be remembered that corporate finance is all about making critical financial decisions with a direct role in building value for a business. Apart from accounting, candidates should possess an excellent knowledge of finance, investments and corporate theory among other things to succeed as a professional.
- Good accounting skills and excellent analytical abilities
- Broad-based knowledge of corporate finance and excellent communication abilities
- Expert knowledge of financial analysis or other concepts depending on relevant job roles
Undergraduates in finance, investments and related areas can prepare for an investment banking career by developing necessary skills. Usually, firms prefer to hire MBAs from top institutes as business-oriented courses and certifications would help prepare better for investment banking roles, although one would need expert knowledge of finance as well. MBA is one of the few courses in finance with excellent networking opportunities which can be a big advantage for professionals in this field. As a matter of fact, banking internships are more competitive than some entry-level positions in other areas of finance. Most of the investment banking professionals start their career as analyst or associate and after a few years of professional experience under the belt, they can begin an arduous climb up the career ladder to acquire the positions of VP, Director and Managing Director.
- Advanced knowledge of financial concepts and excellent analytical abilities
- Should possess excellent networking abilities and be an expert at client negotiation
- An ability to perform well under pressure.
- Hard skills like Financial Modeling, Valuations, Excel, PPT etc is a must
#3 – Employment Outlook
Corporate finance is not only broader in its scope but also offers a greater variety of job roles as compared to investment banking. It must also be made clear that investment banking roles are typically far more competitive than most of the corporate finance roles and are comparatively hard to find as well. In corporate finance, individuals can carve out a career path as an accountant, financial analyst, advisors, account managers or treasurers among other professional roles.
Investment banking is not only a specialized branch of corporate finance with fewer career opportunities. Investment bankers help their clients issue equity and debt securities to raise major capital and facilitate M&As (Mergers & Acquisitions) along with other major financing activities. This kind of role requires people on the higher end of spectrum in terms of communication skills and negotiation abilities, authoritative knowledge of finance and a flair for mathematics, qualities which can be a little difficult to find in a single individual.
Till about a decade ago, investment banking was the preferred choice of a career in finance. However, the playing field has been leveled out to an extent in the past few years, as investment banking took a hit, especially in the post-credit crunch era as economy continues to recover and financial industry is witnessing a large scale restructuring. Even today, investment banking is a prized choice but it has become increasingly difficult to get in. In New York and London, two of the global investment banking hubs, they prefer to hire from the best of Ivy League schools, which may not be everyone’s cup of tea.
On the whole, as per an estimate by the US Bureau of Labor Statistics, financial industry is set to witness nearly 11% job growth between 2012 and 2022. This can be considered a healthy figure, as far as long-term averages go and it bodes well for anyone planning to take up finance as a career.
#4 – Corporate Finance vs Investment Banking – Salary
It would be quite difficult to identify the average earnings of corporate finance professionals as the nature of work varies a great deal from one job role to another. However, as per a research by Robert Half International in 2009, an entry-level financial analyst earn anywhere between $35,000 to $50,000 annually. In larger firms, they could earn between $40,000 to $50,000. To put things in perspective, perks have gone up since, taking the median salary for a financial analyst to around $79,000 as of May 2014 according to the US Bureau of Labor Statistics. Experienced analysts can earn as much as $55,000 to $88,000 whereas a tax manager might earn between $90,000 to $130,000 per year. Assistant Treasurer could earn between $85,000 to $115,000. On the higher-end, a chief financial officer (CFO) can have a pay package in excess of $250,000 on an average.
Despite a slight downturn in the investment banking sector, it continues to offer much higher remuneration as compared to any jobs in corporate finance. Even investment banking interns might earn $70,000 to $80,000 on an average and after joining as an analyst, they could earn between $115,000 to $130,000 with bonuses in the range of $15,000 to $30,000. One of the most significant factors in this respect is the size of firm which largely determines the kind of remuneration one might be offered. For instance, large firms in New York could pay between $120,000 to $200,000 for top MBA graduates, which is way above the average package. However, in smaller firms it could be comparatively much lower. After accumulating an experience of more than 3 years, associates could earn anywhere in excess of $200,000 per year on an average. There has also been a rising trend of equity-based incentives being awarded to investment banking associates.
Both in corporate finance and investment banking, the size of the firm hiring an individual might make all the difference in terms of pay package and incentives. This is why remuneration for similar positions might vary to a great extent in different firms so based on salary figures Investment banking should clearly be the better choice but it appears that with a large firm, one might be able to earn much higher in a corporate finance position as well.
#5 -Career Pros & Cons:
- Average median salary for several corporate finance positions indicates that most of the openings in this domain fall in the higher-earning bracket within financial industry. Perks are quite good and growth prospects are abundant.
- There is a greater variety of career roles as compared to investment banking, making it easier to choose a role in keeping with individual skill sets and capabilities.
- Higher number of openings are available in this field as compared to investment banking. Despite being competitive, it would not be nearly as difficult to land an opening in corporate finance as in investment banking.
- Work hours are not among the best but stand on a much better level as compared to investment banking. As far as finance careers are concerned, work hours are not bad but then again it might depend on the exact nature of role and the work pressure.
- For some of the job roles, a Master’s Degree could be required, and generally people with relevant certifications to support their career role are preferred over most others. This makes the field slightly more competitive as compared to some other finance areas. However, corporate finance involves key decision-making activities and it would only be reasonable if employers prefer to hire those with a competitive advantage.
- Most career roles are not nearly as well paying as the majority of investment banking jobs. However, with a good firm, one could bag a higher pay package.
- One of the obvious downsides is in terms of recognition. Where investment bankers are often lauded for their contribution to successfully brokering M&A deal or other major transactions, corporate financial analysts are not considered on the same pedestal despite the critical nature of their work.
- It is a kind of front-runner choice in terms of a finance career. One of the reasons being that it is one of the best compensated jobs which brings a good deal of industry recognition. Entry-level perks are undoubtedly among the best in financial industry and even an entry-level investment banker working with a large firm can earn much better as compared to more experienced professionals in other areas of finance.
- The learning curve is steep for entry-level analysts who get to work in an intensive work environment and interact with some of the best minds in the industry. The initial phase of 2-3 years can help them acquire a solid foundation in investment banking and could be in for the long haul. After putting in a few years of hard work, they can go on to occupy the positions of VP, Director and Managing Director.
- This job role is cut-out for those driven by a desire to outperform competition and possess a combination of excellent negotiation capabilities, advanced knowledge of finance and ability to handle intense work pressure.
- After the 2008 global meltdown, there has been a decline in investment banking jobs but it continues to be one of the most promising careers as major corporations continue to hire fresh talent. However, with another market slump things could take a turn for the worse for investment bankers.
- Due to intense work pressure, a lot of entry-level analysts move on to new roles within the first couple of years which has also come to be known as the 2-year itch. If anything, it indicates how demanding this job role can be and not everyone may be cut out for it.
- Work hours are intense, to say the least, with investment bankers working for an average of 75 to 100 hours a week. Even those who survive the initial phase might need to pay extra attention to their health in later years, given the kind of work strain. Do checkout the Investment Banking Lifestyle
#6 – Corporate Finance vs Investment Banking – Work-Life Balance
Corporate finance appears to be a better choice in terms of working hours as compared to investment banking. In fact, investment banking enjoys a rather poor reputation for intense work hours and there is but little time left for family, friends, recreation or relaxation. As one of the most competitive finance jobs, one would rather expect professionals at higher levels to be incentivized with better work-life balance, but it might not be the case.
Even in corporate finance, work hours are not among the best but professionals usually have enough time and energy left to stretch their legs. However, as most of the roles in corporate finance widely differ in terms of responsibilities, work hours might also vary. Still, on an average, they enjoy a more balanced professional existence. Investment banking is usually meant for those who love to be recognized as workaholics.
While making a choice of career, any individual should try to assess in an objective manner if he or she possesses the desired skill set and, most importantly, if they would like the work role or not. The same holds true for both of these careers as well. Both are competitive areas in finance with good perks and excellent growth opportunities but investment banking clearly has an advantage in terms of compensation and possibilities to grow as a professional. Those who value spending creative time away from work might prefer corporate finance over investment banking as the latter may not be such a good choice in terms of work hours. However, the decision should not be based on any single factor, be it the compensation or work hours. A balanced view of the work role should be carefully measured against the skill set, capabilities and goals of an individual before one decides anything.