Wealth Management vs. Investment Banking: The Differences

When you ask college students what area of finance they'd most like to break into, usually the answer is investment banking. 

This isn't overly surprising. Investment banking offers an unparalleled opportunity for a young person to get quickly up the learning curve of finance and potentially have great exit opportunities to other areas of finance (either within high finance or in corporate America). 

With that being said, many of those who enter into investing banking do so naively not realizing exactly the nature of the work. For many, they soon find out that investment banking is not what they bargained for.

The reality is that prestige can be of import early in one's career. Name brands do matter. However, at a certain point you need to choose a career to build around for the rest of your life. Choosing one purely based on prestige, or the certainty of money you'll make, is unlikely to afford you an overly fulfilling life. 

One of the issues young people have is not being able to clearly know the nature of the roles they are applying to. As a result, they go off of the advice of other young people who are perhaps equally unqualified to speak on the subject.

The following are some differences between investment banking and wealth management you should be cognizant of before going into either role. 

Difference #1: How Analytical It Is

Most wealth management roles - even at a large private wealth manager like Goldman Sachs or Morgan Stanley - will require a high level understanding of the markets, but not necessarily be overly analytical.

In contrast, investment banking won't involve many high level discussions of markets at the analyst or even associate level. Instead, you'll be doing highly analytical work building out DCF models and putting together pitch books. 

As you get more senior in investment banking, the role becomes one much more predicated on sales (as you're trying to sell companies on using you for an IPO, M&A transaction, or capital raise). However, at the junior level your interpersonal capacities are more likely to atrophy than increase.

Difference #2: Exit Opportunities

One of the primary reasons that young people look to investment banking is that it is a bit of a finishing school. You can go there, do your two years, and then pivot to something else (if you're at a top group, this could be in the private equity or hedge fund space).

Many people somewhat bizarrely criticize wealth management for the lack of exit opportunities it provides. The reality is that there aren't really supposed to be exit opportunities from wealth management, it is the exit opportunity!

You are supposed to stick around and make your entire career out of wealth management. It's not something you do for ten-years before moving on. It's somewhat nonsensical to think about wealth management in terms of anything other than being a career for your lifetime. 

This is part of the reason why I stress how important it is to think soberly about getting into wealth management. While it is great, it is a commitment and like any commitment you should consider it seriously and not jump into it.

Difference #3: Relationship Continuity

In investment banking you may have relationships, at the most senior levels, with CEOs for decades, sure. However, by in large you're doing one-off transactions with clients or dealing with them once every few years.

In wealth management, your clients will be with you for decades and you'll be speaking to them at a minimum once every quarter, but likely even more. 

Unlike in investment banking, you will not be doing something for them and then forgetting about them shortly thereafter. Depending on your personality the continual interaction with the same cohort of people may be a positive or a negative in your view. 

Difference #4: Compensation Structure

In investment banking, up until you hit the point of being a managing director your pay will be tied to the general performance of your group or the bank, but not to yourself.

Within a few years of being in wealth management, by contrast, your compensation will be entirely dictated by your performance. More specifically, how many clients you have and how they've done.

This is perhaps the largest, practical difference between wealth management and investment banking. In IB your compensation is more known with increases as you get more senior in the bank. In wealth management, almost from the beginning, your compensation is predicated on your capacity. 

Difference #5: Career Stability

Career stability is almost inverted between investment banking and wealth management.

As a general rule, in investment banking you will almost certainly not be laid off until you hit the vice president level, because you're more or less a worker bee until that point (and quite cheap relative to more senior people). While most people don't want to stay in investment banking that long, so do end up leaving, it's their choice. They could certainly stay in their investment bank or lateral to a different one if they were inclined to do so.

However, as you get to the VP / MD stage that's when people begin to be shown the door in investment banking. This leads many people, usually in their thirties, to need to reinvent themselves in some fashion after spending a decade or more in investment banking. 

By contrast, in wealth management the first 3-5 years is incredibly precarious. The majority of folks will leave the industry during this time. However, if you can get through this first period you have remarkable career stability, because you are essentially tied to the assets of your existing clients (even if you don't get many new clients).

It is very rare to see those who have been in wealth management for a decade or more leave the industry unless they just want to do something entirely different. 

Difference #6: When it Becomes About Sales

As briefly touched on before, investment banking really does become more or less a sales job as you reach the managing director level. You are no longer plugging and chugging in Excel. Rather you are coming up with ideas, pitching them to clients, and hoping to entice one of them to actually act on your idea. 

By contrast, in wealth management, your role is fundamentally a sales role from the get go. You're pitching potential clients from day one, coming up with ideas to help them, and at some firms doing the classic "smile and dial".

The reality is, you shouldn't plan on a long career in either industry if sales isn't something you're interested in. However, you can do investment banking at the analyst or associate level, which is more analytical and involving no sales, and then move to a hedge fund analyst role or something analogous that likewise involves no real sales. 

However, I would caution that sales is a skill set. Even in an analytical role, like being a hedge fund analyst, you still need to sell your ideas to your portfolio manager to have them executed. In just about any job, there will be someone you need to convince in order to do what it is you want to do.

Conclusion

Personally, I always find it concerning when I hear from someone who wants to do either wealth management or investment banking.

That illustrates to me that they really just want to work in finance, in some capacity, and haven't seriously considered the differences between the two lines of the work. The reality is they are incredibly different. Not just at the senior level, but from the very earliest point in your career.

My biggest piece of advice would be to recognize that name brands do matter. However, no amount of prestige or potential future earnings can make up for doing something you deeply dislike.

Young people generally don't appreciate this point because they are so focused on what the next year will bring. In other words, they're very short sighted. That's perfectly rationale, of course.

But once you get into your career for a few years then you begin to think in terms of decades, not the next year or two, and the reality of doing something you dislike, or see no future in, can be incredibly demoralizing. 

Choose where you begin wisely. Think about how your personality fits with those who succeed in the field. If you can work at a great name brand early in your career, that's fantastic! But the reality is life is both too short and too long to do something you find not to be fulfilling.