Difference Between Investment Banking and Asset Management
The very basis of investment bankingBasis Of Investment BankingInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc., as well as asset management, lies in handling money. Many students find it challenging to make a career choice between the two, owing to the competitive salary packages both of them offer. The latest statistics reveal that investment banking as well as investment management firms offer the highest starting salaries to graduates.
Both are fiercely competitive industries and hire the best talents from the world’s top universities, mostly finance graduates or postgraduates primarily, MBAs Masters of Business Administration or CFAs Chartered Financial AnalystCFAs Chartered Financial AnalystThe Chartered Financial Analyst (CFA®) Program offers a graduate-level curriculum and examination program designed to expand your working knowledge and practical skills related to investment decision-making. .
Let’s understand the basic difference between the two industries.
What is Investment Banking?
Investment Banking is the area of banking that assists in the creation of financial capital for its clients be it institutions, companies, governments or other entities. Basically, investment banking is about providing an exchange market for raising money and making it available, to those who are in need of money for financing or expanding their business from those who have excess capital and are looking at means for lucrative investment options.
Capital is raised by means of Initial Public Offering (IPO), mergers and acquisitions(M&A), stock purchases and other techniques.
An Investment bank acts as an underwriting Underwriting The underwriters take the financial risk of their client in return of a financial fee. Market Makers like financial institution and large banks ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there.agent and raises capital via debt or equity and is involved in other IPO management activities like a consultation, book building process, framing a company’s memorandum of understanding and offer letter along with looking after the legal aspects of an IPO. The investment banking division of the bankInvestment Banking Division Of The BankInvestment Banking Division is a segment of the investment bank offering advisory & corporate finance services. It executes mergers & acquisitions, deals with capital raising, & handles several kinds of advisory mandates. also finds clients for the public issue be it mutual funds, insurance companies or pension funds. It also assists in mergers and acquisitions by providing all kinds of additional services to its clients including securities research, market making and trading of equities, derivatives, fixed incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments. securities, commodities, and currencies.
An investment bank’s activities can be further classified into the “buy-side” and “sell-side”. The “buy-side “as the name suggests, provides buying advice to its clients which are mutual fundsWhich Are Mutual FundsA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks., hedge fundsHedge FundsA hedge fund is an aggressively invested portfolio made through pooling of various investors and institutional investor’s fund. It supports various assets providing high returns in exchange for higher risk through multiple risk management and hedging techniques., unit trusts, life insurance companies, and private equity funds. The “sell side” on the other hand involves trading of securities for cash or other securities by facilitating transactions or market-making along with raising capital through underwriting and research activities. Since both the areas of functioning are conflicting in nature, it’s essential that the information doesn’t cross from one side to the other hence an information barrier is created within investment banks so that insider informationInsider InformationInsider Information is a piece of fact, information or an understanding (M&A, New Contracts, R&D breakthrough, new product launch etc.) which could impact the prices of a listed entity or publicly-traded organizations once disclosed in the public domain. Trading based on such information is considered to be illegal. is safeguarded to avoid any conflict of interest that may develop in future.
What is Asset Management?
Asset Management in the simplest form can be defined as the business of handling others’ money. Asset management or investment management firms are typically financial services companies that invest their clients’ money in securities, equities, debt, commodities, derivatives, currencies et al.
Financial assetFinancial AssetFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash. management firms employ professionals who are experts at handling other peoples’ money. It involves managing money and handling investments of clients. Different clients have different requirements, a good asset manager looks into the particular needs of his clients and recommends investment products, based on the asset allocation of the client.
It is an exhaustive field that involves planning, recommending, and reviewing the investments of the clients be it individuals or companies. Handling money is a tricky job that requires you to be on your toes always. The basic aim of any asset manager is to invest the money at avenues with minimum risk and maximum returns.
A wealthy individual doesn’t have the time and inclination to manage his investments all by himself, that’s where asset managers come into play. An asset manager has the expertise and knowledge to manage the client’s money by diversifying their investments and earning more returns for them, thus enhancing their overall portfolio.
Asset management firms also referred to as investment management firms employ professionals who have analytical skills and are able to assess which investment products will be beneficial for their clients so as to achieve the desired financial objective within specified guidelines. The products in which professionals invest client’s money are mutual funds, hedge funds, pension funds, retirement funds, etc. in various financial vehicles like options, futures, equity, derivatives.
Asset managers recommend various products and vehicles of investment after doing due diligence and assessing the risk appetiteThe Risk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation. of their clients, understanding their financial goals and the amount of returns they expect keeping the risk in mind. Their aim is to maximize the returns and ensure that the financial objective set by the clients is achieved.
Asset management firms hire the best talent from the top universities of the world, there are certain prerequisites that are needed for hiring, which would be a degree in Finance primarily a CFA Chartered Financial Analyst or an MBA Masters of Business Administration in Finance. Though these degrees are not required for entry-level jobs as you work up the corporate ladder in an asset management firm these degrees are very beneficial. The second most important requirement would be, being an expert at number crunching and good quantitative and analytical skills help you in the job along with strong communication skills since as asset manager’s profile needs a lot of interaction with the client at all times.
The job options in an asset management firm are galore. You could be employed as a relationship manager, sales manager, portfolio managerPortfolio ManagerA Portfolio Manager is an executive responsible for making investment decisions & handle investment portfolios for fulfilling the client’s investment-related objectives. Also, he/she works towards maximizing the benefits & minimizing the potential risks for clients. or financial advisor all of which are extensive client interactive profiles.
Investment Banking vs Asset Management – Education & Skills
The education, as well as skills required for both the fields, are the same. Firms look for candidates who have a flair for numbers and have knowledge in business disciplines be it finance, economics, accounting, and investment analysis. Candidates seeking to make a career in investment banking or asset management should be ready for enormously tough competition from graduates from top business schools and universities.
A degree in MBA along with relevant work experience is a prerequisite for an entry-level position in the firm. It’s extremely difficult to get hired by major firms most of which look for strong references from respected professionals in the field. Hence networking plays a major role in breaking through large corporate players, having the right contacts help to give you an advantage amongst others. Since the competition is really stiff most firms also consider internships as an extended application process to skim through the right candidates.
The skillset sought by companies majorly includes.
- Financial Modeling SkillsFinancial Modeling SkillsFinancial modeling refers to the use of excel-based models to reflect a company's projected financial performance. Such models represent the financial situation by taking into account risks and future assumptions, which are critical for making significant decisions in the future, such as raising capital or valuing a business, and interpreting their impact.
- Valuation Skills – DCF- DCFDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company's future performance. and Relative Valuations
- Strong verbal and written communication skills
- Analytical and problem-solving skills
- Interpersonal and intrapersonal skills
- Negotiation and client service skills
- Time management and attention to detail
- Advanced mathematical and technical skills
- Leadership skills and a go-getter attitude
- Commercial knowledge and in-depth understanding of the subject
The job prospects and occupational outlook for investment banking as well as asset management has always been positive. More investment opportunities are available with the emerging markets, resulting in the innovation of newer and more complex financial products, making the investment portfolios much more multi-faceted than what they used to be earlier.
The U.S. Bureau of Labor Statistics has estimated that the entire finance industry would have a growth rate of 12% from 2014 to 2024, the outlook looks positive as well as competitive for the industry which is projected to create new positions with huge salaries in the near future.
Though, both the industries, investment banking as well as asset management have upward trend and great career prospects it is generally believed that the asset management jobs would experience more growth than the investment banking jobs since there is a lot to be explored in the new and emerging markets which have opened the doors for investment management jobs, but there are some who still believe that asset management industry is not treated at par with the investment banking industry
The top companies hiring investment banking firms and asset managers are Goldman Sachs, Blackstone, JPMorgan and Chase, Merrill Lynch, Well Fargo to name a few.
Investment banking, as well as asset management companiesAsset Management CompaniesAsset Management Company is a company that takes the financial assets of a person, company or another asset management company (generally this will be high net worth individuals) and use the assets to invest in companies that use those as a operational investment, financial investment or any other investment in order to grow the investment., are some of the topmost paying companies in the world. The median average wage was quoted as $80,310 for financial analysts, which increases manifold after years of experience. The average compensation for an asset management firm employee has increased over the last decade to $263,000 in 2014.
Investment banking analysts at entry levelInvestment Banking Analysts At Entry LevelInvestment Banking Analyst works with investment banking team and expertise in the area of Accounting, Financial Modeling, Project financing, Project Valuation, and Financial statement Analysis. These analyst has deep knowledge in Excel and they are good at VBA to analyze the market data and financial modeling. The analytic work consists of building a financial model for different projects like Infrastructure projects (i.e. Power projects, real estate, etc.). can expect anywhere between $65,000 to$95,000 along with bonuses. An experience of three to four years further increases the package to more than $250,000 annually.
The pay gap between investment banking and asset management employees was huge in 2004 nearly half which amounted to $168,000 and $315,000 respectively. The pay structure has changed drastically over the last decade with the salary gap being narrowed down to several hundred thousand dollars typically $263,000 for asset management employees and $288,000 for investment banking employees.
Undoubtedly, these careers are some of the most top paid careers in the world. Their salaries and bonuses are so lucrative that it pulls graduates into these industries. As per the U.S. Bureau of Labor Statistics, median annual wages in May 2015 were $80,310, $67,740, $36,200 for financial analysts, financial specialists and all occupations in the U.S. economy respectively. This figure itself indicates the huge salary gap that exists between the finance industry and all other occupations which also indicate the amount of workload such professionals have to undertake.
Senior-level investment jobs are concentrated in the three financial hubs of London, Tokyo, and New York. Though with the advent of the century and arrival of opportunities in the emerging markets the jobs have shifted to other geographical locations as well, still the major concentration of top-level jobs is still located in these three cities.
Investment banking and asset management professionals have a tough life and have to put as long as 65 to 70 hours a week. The work timings vary for different firms, firms operating in just one market have shorter working hours whereas those operating from all three financial hubs have demanding timings often difficult to cope with. Though it is a very promising and lucrative career offering lofty salary packages along with a high level of commitment and dedication, it is a very emotionally taxing and physically challenging career.
A career in any one of these fields needs unflinching dedication towards one’s job often neglecting the needs of your family and friends.
Investment Banking vs Asset Management Video
Which one to choose?
This is the most difficult question and cannot have a direct answer. It’s like comparing apples with oranges. Both careers are lucrative and offer lots of opportunities for growth and progress. The working hours are taxing and a lot of responsibility and time management skills are needed for having a successful career in both the fields. However, there are key differences that can make it easier for a prospective candidate to choose between the two careers depending upon your area of interest.
Investment banking employees travel more and work for longer hours than their asset management peers. They have to bring the savers to the borrowers which itself is a mentally stimulating task and requires a lot of responsibility and accountability at the end of the investment banker. Moreover, the most key difference is in the salary package of the two. Investment banking professionals most definitely get higher salaries which are substantiated with longer working hours.
Asset management professionals manage money for individuals, corporation et al, which implies that they have a set of clients to look after. They have to oversee the individual needs of all their clients and provide them with unbiased investment advice depending upon their requirements. They have to balance their time and energies between varied accounts and work in larger groups with comparatively lesser individual responsibilities compared to their investment banking peers.
A career choice between investment banking and asset management is a matter of personal choice and individual interests. However, both are lucrative careers and one should not miss an opportunity if one gets a break in any of them, as it is the opportunities are less and the aspirants galore.
This has been a guide to Investment Banking vs Asset Management. Here we discuss which career to choose based on education & skill requirement, salary, career pros & cons, etc. You may also have a look at the following articles –