If you are looking for a place to deposit your money, an investment bank is not useful at all.
If you represent a profitable corporation, or have a high liquid net worth, investment banks can serve several useful purposes.
Of course all these purposes are tied first to making investment bankers money as quickly and largely as possible, secondly to servicing their most profitable customers, thirdly to serving huge customers that take due diligence seriously and protect themselves with a caveat emptor attitude, and finally selling to anyone that clears their required liquid asset hurdles.
Somewhere in here investment bankers want to exercise their need to feel important and in control. They want to define the rules of engagement with you, their customer. You will want to define your own position.
It does feel good to be in a room with a few other “movers and shakers” being pitched on funding someone’s vision of a profitable venture. Beware. If you take everything you will be shown anything. If you turn down everything, your time and their time is being wasted. Only put yourself into this sales cycle if you are seriously intent on discovering exceptional opportunities, and are willing to commit if your analysis confirms your intuition. A simple goal might be to have a portion of your portfolio dedicated to finding opportunities that can increase at least ten fold. Some will crash, some will dawdle, but if you’ve been selective one or two may soar beyond ten fold. You are already wealthy or you wouldn’t be in the room – be picky.
What if you are the one seeking funding? Investment banking firms are usually one stop shopping. You go, hat in hand, looking for someone that can accomplish miracles at a cost of less than your soul. If there are legal barriers keeping them from fulfilling your every need, they’ll package those extra needs for someone that will handle them. If your potential matches the mood of the market you will be shopping for a lead underwriter that will distribute the excess of your inventory to other investment bankers. Just like any love affair; it’s better to have several well heeled pursuers than be the pursuer of a single prospect. Anyone big enough to have a gaggle (I’ve been geesed – I can count) of investment bankers coming hat-in-hand to them isn’t likely to be reading this.
Investment bankers will offer trading ideas. Often these ideas are based on their need for liquidity and they may be trading with you or acting as a counter party on the other side of the trade. Be careful. Big money does not move quickly or easily. A founder of a successful Internet company will not say “I need three hundred billion dollars by tomorrow, hit the bid.” Instead the investment banker will give a price they think will get them the business, then they will take some of the action. Starting by calling other investment bankers to take some securities to distribute, they’ll then call hedge funds and other big money interests that might jump at a chance to move large sums of money in a single transaction, then they’ll call you. They may take what’s left over themselves and have a retail operation push all their interest off on doctors, dentists and Indian Chiefs. Every step of the way, investment bankers will maximize their own profits.
As a result of this large transaction base, a very profitable opportunity is available to investment bankers – Mergers and Acquisitions (M&A). The Corporate Finance Division, or something similarly named, will pitch potential M&A clients. If they secure a customer it’s off to the races with underwriting, security issuance, negotiating with bidders, and a whole bunch of high value/profit activities. You may get a chance to participate. Often these deals include support of a securities price for a period after the transaction is complete. An investment banker will not get new business if they let old business lose too much money, too quickly, in an obvious way. That support will stop eventually. If the price does not ignite after your involvement you may want to drop your burning match by unloading a position in a decorous manner – you won’t get many new offers if they have to support the price by always buying your instant resales. If their expected short term support of the price is the only reason to buy, don’t take the offer.
These are the major front office sections of an investment bank, there are many other moving parts. If you have a private banker, wealth management advisor, or similar contact they will be glad to inform you of investment management choices, global institutional banking, merchant banking, and other services. Some of these services are quite valuable in particular instances.
Keep aware. Know where your money is, where growth/loss comes from, and where your money is going. Investment bankers have value, but they are not in business to make you wealthy. If you profit also that is nice and they will try to keep you as a customer. If you go broke, they will replace your business with someone else. That’s why they are always looking for new customers. Next!
Josh Morph