Before jumping into this question, let’s point out an important distinction. Thousands of people work in investment banks. For example, according to a Google search, Goldman Sachs had over 36,000 employees in 2018. While all of those 36,000+ people worked at an investment bank, not all of them; and in fact, only a small percentage of them are actually investment bankers (i.e., folks working in the investment banking division, IBD). The rest work in different functions like technology, sales & trading, research, private wealth, compliance, etc, which are all good jobs too.
Given that there are lots of different roles at investment banks, why are so many young applicants usually more interested in pursuing IBD roles instead of other functions? Let’s take a look at a few main reasons:
Compensation
Overall, bonus compensation usually tends to be higher in investment banking than other functions, though there are some exceptions in sales & trading depending on the desk and how good the markets are. That said, on average compensation tends to be higher in IBD.
Exit Opportunities
People early in their finance careers always talk about exit options—what future opportunities will this role potentially help me land? Honestly, it can actually be counterproductive and not helpful to focus inordinately on the future at the expense of the present, but prudent career and life planning does require thinking about next steps to a degree.
With that in mind, IBD does provide the most optionality for next steps into other roles in private equity, hedge funds, corporate development, and other similar roles. Additionally, even if you decide to stay within your bank but want to move divisions, it’s significantly easier to move from IBD to say private banking, than the other way around.
Why then is IBD experience so helpful relative to other roles? This can largely be distilled down to the following points: 1) the financial modelling/valuation skillset; and 2) understanding the transaction process (“doing deals”). These two together can be applied to a wide variety of settings, hence greater optionality.
Of course, there are other roles that expose you to some of these skills. Like working in equity research, you will be working on financial models a lot, which may be helpful for transitioning to an equity focused hedge fund, but the lack of deal experience would likely preclude a transition of that same equity research professional to private equity, while someone in IBD would generally be competitive for both roles.
Herd Mentality & Vanity
The truth is the average university student pursues roles in investment banking because of some combination of perceived prestige and the money, which is often enhanced by their peers. This is especially true at universities that tend to send a fair number of their students into financial careers. Working for an investment bank is perceived as elite, and IBD generally the most elite, which is why many follow the herd. Frankly, there is often little about the role itself that people find intrinsically rewarding but when your friends are talking about interviewing at really famous firms and a recently graduated frat brother shows up with a USD 20,000 watch on his wrist he bought with his first bonus from some famous investment bank, it can be difficult to ignore the allure.
As you prepare for a career in finance in general, and investment banking in particular, it’s good to be honest with yourself and aware of your motivations.