Investment banks are specialized financial institutions that help governments, corporations, pension funds and other large investors raise capital, manage complex transactions and execute strategic financial decisions. The largest firms—Goldman Sachs, JPMorgan Chase, Morgan Stanley and Citigroup—combine global reach, capital markets expertise and advisory services. Smaller boutiques focus on particular industries or deal types (for example, healthcare or middle-market M&A).
Key takeaways
– Investment banks underwrite and distribute securities (equity and debt), advise on mergers and acquisitions (M&A), and provide sales, trading and research services.
– Their revenue comes from underwriting fees, advisory fees, trading profits and commissions, asset-management fees and other services.
– Conflicts of interest can arise because banks advise clients while also trading or selling securities; they use “ethical walls” (Chinese walls) and disclosure rules to mitigate these conflicts.
– The U.S. Department of Labor’s Retirement Security Rule (issued Apr. 23, 2024) increases fiduciary protections for retirement advice, affecting what advisers and banks can recommend to retirement investors.
How investment banks function — core activities
1. Underwriting and capital raising
– Equity: Managing IPOs and follow-on (secondary) stock offerings. Banks perform valuation, prepare offering documents (prospectus), coordinate roadshows and sell shares to institutional and retail investors.
– Debt: Structuring and placing corporate bonds and other debt instruments with large investors, often through syndication.
– Underwriting structures: firm commitment (bank buys securities and resells them) vs. best-efforts (bank sells on client’s behalf without inventory risk).
Revenue: underwriting spreads and issuance fees.
2. Advisory services
– Mergers & acquisitions: valuation, structuring deals, negotiating price and terms, managing due diligence, arranging financing and offering fairness opinions.
– Strategic finance: capital-structure advice, divestitures, recapitalizations and restructuring.
Revenue: advisory fees (often a percentage of deal value or fixed retainer).
3. Sales, trading and market-making
– Market-making and execution for equities, bonds, derivatives, commodities and currencies.
– Proprietary trading (trading the bank’s own capital) and agency trading (executing client trades).
Revenue: trading profits, commissions and bid-ask spreads.
4. Research
– Sell-side research analysts produce company, industry and macroeconomic reports (buy/hold/sell ratings). Research supports sales and trading and can be sold or provided to clients.
– Research informs internal strategies and helps attract client order flow.
Revenue: indirect (supports trading and sales revenue) and direct (research subscriptions or advisory services to clients).
5. Asset management, prime brokerage and other services
– Asset management for institutions and wealthy individuals, custody, prime brokerage for hedge funds, structured products and risk-management services.
Revenue: management and performance fees.
Investment banks as financial intermediaries
– Match large issuers of securities (corporations, governments) with investors (pension funds, mutual funds, insurance companies, hedge funds).
– Use scale and distribution networks to place large, often customized, transactions.
– Provide liquidity to markets through market-making activities.
Strategic financial advice: what banks do and why it matters
– Pre-transaction counseling (readiness, timing and market conditions).
– Valuation and structuring to meet strategic goals (growth, consolidation, tax and regulatory considerations).
– Negotiation, execution and post-transaction integration planning.
Why it matters: Good advice can materially affect price, financing costs, regulatory outcomes and long-term shareholder value.
Investment bank roles in mergers and acquisitions
– Sell-side advisory: maximize price and terms for the seller, identify and contact bidders, manage auction processes.
– Buy-side advisory: target screening, valuation, negotiation and arrangement of acquisition financing.
– Fairness opinions and conflict management: banks often issue fairness opinions to boards to document rationale and protect fiduciaries.
Insights from research divisions
– Produce credit research, equity research, macroeconomic reports and quantitative models used internally and externally.
– Help institutional clients make allocation and trading decisions.
– Sell-side research can create conflicts if analysts’ compensation is linked to trading/sales or investment banking business; independent internal policies and disclosures are standard mitigants.
Important: conflicts of interest and ethical walls
– Banks perform advisory work while trading and underwriting—this can create conflicting incentives (e.g., favoring certain securities or using non-public information).
– Typical mitigants:
• Chinese/ethical walls between deal teams, research, trading and sales.
• Disclosure to clients of material conflicts.
• Regulatory oversight and internal compliance programs.
– Investors and clients should ask about policies and obtain written disclosures.
Challenges and criticisms facing investment banks
– Conflicts of interest between client advisory and proprietary activities.
– “Too-big-to-fail” systemic concerns for large global banks.
– Risk-taking and leverage can produce large losses and require regulatory intervention.
– High fees for advisory and underwriting services can be criticized by issuers and public stakeholders.
– Culture and work-life balance issues (especially for junior professionals).
– Regulatory fines and settlements historically tied to misconduct in sales, trading, and advisory functions.
Retirement Security Rule (fiduciary advice for retirement accounts)
– The U.S. Department of Labor issued the Retirement Security Rule on Apr. 23, 2024.
– Effectiveness: rule takes effect Sept. 23, 2024, with a one-year transition period delaying certain conditions to 2025.
– Impact: raises the standard for advisers handling retirement accounts under ERISA from “suitable” to a fiduciary “best advice” standard. This can restrict product recommendations and require stricter disclosures and conflict mitigation.
Practical implication: retirement investors and plan sponsors should confirm whether advisors are fiduciaries under ERISA and seek written disclosures about conflicts and compensation.
Practical steps — for different audiences
A. For companies planning an IPO or large financing
1. Assess readiness: financial reporting, internal controls, governance and public-market preparedness.
2. Select potential banks: issue an RFP or host a limited auction; evaluate sector expertise, distribution reach, reputation and pricing.
3. Negotiate engagement terms: underwriting structure (firm commitment vs. best efforts), fees, stabilization arrangements and lock-up periods.
4. Conduct due diligence and prepare documents: audited financials, prospectus (S-1 in the U.S.), and investor roadshow materials.
5. Coordinate pricing and allocation: use bookbuilding and investor feedback to set offering price; manage aftermarket stabilization and communications.
B. For institutional investors, pension funds and governments
1. Define objectives and constraints: liquidity needs, time horizon, regulatory constraints and risk tolerance.
2. Run a competitive selection: request proposals from multiple banks and compare track records in relevant sectors and deal types.
3. Negotiate fees and execution terms: align incentives with your objectives (e.g., success-based fees, transparency on allocations).
4. Monitor conflicts and compliance: demand written conflict-of-interest policies and regular compliance reporting.
C. For individual investors and retirement plan participants
1. Check advisor status: confirm whether the advisor acts as a fiduciary under ERISA or other standards.
2. Seek full fee transparency: ask for total costs (commissions, management fees, spread costs).
3. Ask for conflicts disclosure: how does the firm handle potential conflicts between advisory and trading activities?
4. Consider passive alternatives: index funds and ETFs may reduce fee and conflict exposure for retirement accounts.
D. For prospective investment banking professionals
1. Build credentials: strong quantitative skills, internships, CFA exams and technical modeling experience.
2. Network and prepare: informational interviews, pitchbooks, technical and behavioral interview prep.
3. Understand career trajectory: analyst → associate → VP → director/MD; expect long hours early on; compensation can be high but volatile.
4. Evaluate fit: sales & trading, research, investment banking (M&A/corporate finance), asset management and operations each require different skill sets.
The bottom line
Investment banks are central to capital markets and corporate finance: they underwrite securities, advise on strategic transactions, provide market-making and research, and offer asset-management services. Their size and networks allow them to execute large, complex transactions, but the mix of advisory and trading functions creates potential conflicts that are managed through ethical walls, disclosure and regulation. Recent regulatory changes—such as the Retirement Security Rule—strengthen fiduciary duties for retirement-focused advice, so clients and investors should actively verify adviser status, fee transparency and conflict mitigation.
Sources and further reading
– Investopedia, “What Is an Investment Bank?” (Sydney Burns):
– Duke University Department of Economics, “What Is an Investment Bank?”
– U.S. Bureau of Labor Statistics, “Financial Analysts: Summary”
– U.S. Department of Justice Office of Justice Programs, “Chinese Walls: The Transformation of a Good Business Practice: Abstract”
– Federal Register, “Retirement Security Rule: Definition of an Investment Advice Fiduciary”
– U.S. Department of Labor, “Fact Sheet: Retirement Security Rule and Amendments to Class Prohibited Transaction Exemptions for Investment Advice Fiduciaries”
– J.P. Morgan, “Retirement Insights”
– Provide a checklist your company can use to evaluate investment banks for an IPO or bond issue.
– Draft questions you should ask a prospective investment-bank adviser or sales contact.
– Provide a sample RFP template for selecting an investment bank.