by Judy Yuan
Published: Wednesday, November 14, 2012
Money makes the world go ‘round, so it is hardly a surprise that more and more law students are drawn to interviews with investment banks. The finance industry has always been a competitive field, due in large part to the glamour and prestige assigned to the working relationships with industry titans, but what does it really mean to be an associate at an investment bank? Below, you’ll find a brief—and oversimplified—discussion of some common myths about becoming an investment banking associate.
Myth 1 (Getting There): I do not need prior finance experience to be an investment banking associate.
Though it is true that you do not need prior finance experience to be an investment banker, the world of finance is largely about number crunching and analytical ability. While this doesn’t mean you need to have prior finance experience or training, you will need to know at least rudimentary finance and accounting. Investment banking positions can be one of the most stressful and demanding jobs at the associate level, and this is reflected in the interview. Interviews normally go three or four rounds (sometimes more) and each round can have six (sometimes more) interviews each, especially in the later rounds. The interviews themselves are also known for being deliberately stressful (a stark contrast from law firm interviews).
There are generally two components to the finance hiring process: the fit component and the technical component. The fit component is similar to law firm interviews in the sense that interviewers are trying to figure out what your attitude towards work is like, how well you work in teams, how interested you are in finance generally, how interested you are in the job for which you are applying, and how much you know about the firm/industry to which you are applying. To make a good impression in the fit component of your investment banking interviews, read lots of business publications, talk to alumni who are in the industry, prepare a list of questions for the interviewers, and practice your answers with mock interviews.
For the second component, in asking technical questions, the interviewers want to judge your analytical and quantitative skills. If you are a law student with no finance experience and no formal technical education, then expect the technical component of your interview to be especially tough. If you don’t know the basic concepts of finance and accounting, your interviewers will believe (rightly) that you are 1) either not interested in the position or 2) not competent enough to handle the job.
At the simplest level, investment banking is a type of financial service that focuses on helping companies acquire funds and grow their portfolios. Hence, to be successful as an investment banking associate, you will need to know basic accounting concepts (notably the four major financial statements needed to evaluate a company and how they are interconnected), market valuation, how to do a discounted cash flow (using both the adjusted present value method and the weighted average cost of capital method), comparable transactions and analyses, and the various valuation multiple analyses.
Myth 2 (Being There): Investment bankers live a more glamorous life.
It is common knowledge that investment bankers, like corporate lawyers, work long hours. It is not clear, however, whether investment banking associates earn more than law firm associates annually; this is partly due to the different compensation structure between the two disciplines. Finance has historically been notorious for its hefty bonuses and its recipients have often made a splashy show of it upon receiving large lump sums in one go. What is less known is that the base salaries for investment banking associates are often much lower than that of their law firm counterparts (this varies from firm to firm and city to city). Because most investment banks employ a merit-based bonus matrix, whereas many law firms subscribe to a lock-step bonus paradigm, it cannot be said with any certainty that investment banking associates outpace the earnings of their law firm counterparts.
There is also the question of longevity. Many investment banking associates will never make vice president, just like many law firm associates will never make partner. However, in a law firm, this decision happens much later on. In an investment bank, the decision as to whether an associate will be promoted to vice president usually happens within the associate’s third or fourth year. Later in their careers, many investment banking directors and managing directors will make millions of dollars, as will partners at top law firms, though it is generally acknowledged that top investment bankers will make more money at that level overall.
Myth 3 (Leaving There): I need to be an investment banking associate in order to work on the buy-side (hedge fund, private equity).
Finance career opportunities can be broadly divided into several categories—most prominently, investment banking, commercial banking, asset management, venture capital, private equity and corporate finance positions. There is considerable movement between these positions—investment bankers leave to take posts with private equity firms or in industry, sales and traders leave for hedge funds, etc. Though the relationships and network you build as an investment banking associate are often instrumental to making such moves, being an investment associate is not necessarily a prerequisite for doing so. An associate at a top-tier law firm usually has more or less the same access to these relationships and can often make the same move to the buy-side without having ever worked at an investment bank.
The bottom line is that if you are only interested in being an investment banking associate because your end goal is working in private equity or at a hedge fund, you may be disappointed by how similar the experiences and lifestyle are between the two. Some buy-side exit opportunities can indeed offer a better lifestyle, but you’ll never be working 40 hours a week in any of these industries. And you’ll almost always have a difficult time getting a consistent lifestyle with anything in finance. Before you go down the path of becoming an investment banking associate, make sure you fundamentally like analyzing companies, conducting diligence, and doing valuations and financial modeling in Excel.