Do Investment Bankers Actually Add Value?
“With investment banking, you make a lot of money, and you get a distorted feeling of how wonderful you are. You’ll be flying around in corporate jets and you’ll be attending board meetings, but you don’t really add value.”
-Guy Kawasaki, New York Times Interview
And hey, it’s not just Guy – it’s a common criticism of investment bankers:
You work a lot, but you don’t actually do anything useful.
So should you cross banking off your list?
And what about those corporate jets?
Before delving into these questions, let’s first address this specific quote:
- There are no corporate jets unless you’re a very senior executive. Even MDs fly commercial.
- Board meetings are rare as a junior banker – most of the time you’re too busy or too sleep-deprived to go.
Back in the day I was offered a chance to go to a board meeting for a major public company as a “reward” for having worked on a couple of pitches.
But I had pulled an all-nighter the day before, so I attended the sleeping room rather than the board meeting.
And as for making a lot of money, well, that’s dependent on the economy and whether banks are hiring or firing.
Elements of Truth
But Guy is not entirely wrong.
As a junior banker most of what you do doesn’t add value – you might revise that presentation 73 times, but chances are no one will even look at it.
So there’s some truth to his claim at the end:
“Jobs for college graduates should make them gain knowledge in at least one of these three areas: how to make something, how to sell something or how to support something.”
While you do learn a lot about markets, transactions, and dealing with massive egos in investment banking, you won’t learn as much about making, selling, or supporting products as someone working at a startup.
…but here’s the flaw in Guy’s logic: not everyone wants to start or manage a company.
Some people want other experiences, others want to gain a broader understanding of business, and still others aren’t sure exactly what they want to do.
So if you’re in one of those categories, investment banking is still a good bet.
And no matter what entry-level job you pick, you probably won’t be adding much “value” anywhere.
At first it’s all just learning and moving up the curve, and that’s the same whether you’re an engineer, a marketer, or an investment banking analyst.
Products vs. Services
Finally, you do learn how to make things, sell them, and support them in finance: it’s just that these “things” are financial instruments (if you’re a trader), your own services (bankers), or an investment from your firm (buy-side).
Yes, it’s different from building a new iPhone app that sets the world on fire, but at the very least you learn a lot about selling since you have to do it so much.
And scurrying around to handle all those last-minute changes from high-maintenance clients counts as “customer support.”
So while you may not be changing the world in investment banking, you’re still learning and making yourself more valuable in the process.
And let’s say that you went to work at a Fortune 500 company that makes “real” products.
Maybe you’re in sales, marketing, engineering, or customer support – how much value would you be adding there?
We’ve been over the trade-offs: with these positions the work can be even less intellectually stimulating than finance, and advancement may be near-impossible.
They try to make it sound more appealing by creating “leadership” and “rotational” programs but let’s face the facts: are you more likely to get hired somewhere after working at Goldman Sachs or at a random F500 company?
The More Interesting Question
So yes, compared to a startup founder the average junior banker or consultant doesn’t add value.
But you do learn a lot, position yourself for better opportunities, and give yourself flexibility – which is more than 99% of other undergraduate and MBA students can say.
The more interesting question is whether senior investment bankers themselves add value.
We know what bankers do: they advise companies on deals and help them find buyers, or sellers if it’s a buy-side engagement.
Is The Pay Deserved?
So do investment bankers deserve to make this much money?
I view this as a silly question because it’s like asking, “Should Louis Vuitton be able to sell handbags for $45,000?”
The market and peoples’ behavior – whether rational or irrational – determine what something is “worth.”
People get paid what they get paid based on how much revenue they generate, or what percent of other peoples’ revenue they receive.
So let’s look at the source of investment bankers’ pay: the fees that companies pay them for advising on transactions.
Is It Worth It?
You’ve just sold your company for $1 billion, and you pay the bankers advising you a nice $10 million fee, 1% of the transaction value.
Ridiculous, right? Why should the bank earn $10 million merely for “advising” you, talking to the buyer on your behalf, and making a few presentations?
But that’s the wrong way of looking at it.
Had you not paid them the $10 million, would you have sold for more than $990 million or less than $990 million?
If it’s less than $990 million, then their services were worth it. More than $990 million, and their services actually cost you money.
But there’s no way to determine “what would have happened” had you not hired the bankers.
So you need to look at what they actually did – what new buyers (or sellers) they brought to the table, and whether their involvement resulted in higher or lower prices.
Rules of Thumb
Investment bankers add the most value when:
- The deal is extremely specialized – a hostile takeover defense for a cross-border transaction – and requires skills that only a few bankers have.
- The deal requires longstanding relationships and access to key decision-makers.
- The company is not spectacular but bankers dress it up really well to generate lots of interest and competitive bids, driving the price up.
Investment bankers add less value when:
- They run a generic sell-side M&A auction process where they contact dozens or hundreds of companies but don’t rely on specialized skills or relationships.
- They’re in charge of an IPO or other debt/equity offering where you “have” to use bankers, but where they’re just dotting i’s and crossing t’s rather than increasing the company’s price.
This is why small companies with attractive offers on the table sometimes skip bankers: unless there’s a great potential buyer that only the bank has access to, they don’t add value.
On the other hand, distressed companies and PE firms looking to sell less-than-desirable companies often hire bankers because they’re great at making “ugly” assets look more attractive.
So yes, investment bankers add value – when they help a company earn or save more than the company pays for the bank’s services.
And outside of banking, traders and others in market-related positions add value by making markets and enhancing liquidity.
No, these are not quite the same as changing the lives of billions of people, but if banks truly added no value then they wouldn’t exist.
Bankers get accused of “adding no value” because what they bring to the table – relationships, access to the key decision-makers, and specialized skills – is hard to quantify compared to a company making products.
Private Equity, Hedge Funds, and Others
The case for “value add” on the buy-side is more difficult to make because many times, PE firms and hedge funds don’t improve a company’s operations or help the company make more money – it’s just financial engineering.
Instead, they add value by earning a good return on their investments and then distributing the profits to their limited partners. The limited partners themselves are these firms’ “customers.”
But the public at large doesn’t understand how finance works, which is why you see so many attacks against PE firms for “not adding value.”
So What Should You Do?
If you’re interested in investment banking, then go do it.
You may not add value at the junior levels, but that’s true of any job. What you will do is learn a lot and make yourself more valuable in the process.
But if you want to do something less traditional, then you should go do it right away.
Rather than debating whether or not investment bankers “add value,” focus on adding value yourself – by saving your firm time or money or helping them earn more money.
And don’t listen to every interview you read with dubious claims about investment banking or finance – otherwise, we’d all be flying around in corporate jets.
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