Portfolio Management vs Investment Banking

Let’s understand the basic difference between portfolio management (asset management) and investment banking.

Asset management is all about managing clients’ investments. And investment banking is all about raising the capital for clients.

So, the basic difference between these two is asset management, and clients already have the money you need to manage. Whereas in the case of investment banking, clients don’t have the money, and you need to raise capital to support your clients.

Let’s take an example to illustrate that.

We will take two scenarios and will try to understand how this works.

• Scenario#1

In the first scenario, Client A hires Bank B to help them with investing their money in different areas. Client A tells Bank B – "Take my money and invest in portfolios where you think our money will grow better and will make us wealthier." Bank B then takes the money and invests it in getting better returns on the portfolios they rely upon. It is portfolio management. In this case, clients have money; your job as a portfolio manager is to manage the investment and maximize the client's wealth.

• Scenario#2

In this scenario, Client A wants someone to invest in their business. An investment banker will search for the investor, look for capital raising opportunities in the equity market or via debit, run IPOs, or advise companies on Merger & Acquisition deals. So, the client doesn't have money; an investment banking professional helps the client get the money via capital raising opportunities.

In finance parlance, asset management is also known as buy-side and investment banking is termed as sell-side. (also see buy-side vs sell-side)

So, the outlook for these two should be different. In portfolio management, you will learn more about investment. And you know now why investment banking needs more inputs as you need to bring the business.

To make your mark as a portfolio manager, you need to know a lot. Thus educating yourself with the right qualifications is of utmost importance. Even if you have an undergraduate degree in science, technology, computer science, or biology, you can become a portfolio manager.

For that, you need to sit for an MBA entrance exam and enroll yourself in a top-notch MBA school. Your specialization would be financed. It is the prime requirement. Plus, if you can do a portfolio management course, it would be an added advantage.

Now, let’s say you want to reach the top 5% of the portfolio managers in the world. Then, you need to do a course which is not for faint-hearted. It would be best if you enrolled yourself for CFA (US). If you can clear three levels of this tough exam, with little help from your network, you can reach a level where very few reach. Also, remember that you can look for an internship in portfolio management to get some experience and upgrade your education. You won’t earn much, but whatever you will learn during your internship days. You can learn more about CFA exams here

Let’s come to what you need to do if you want to be an investment banking professional. The investment banking profession is more about corporate finance and business. So, you need to have a depth of knowledge in financial models and valuation. At the same time, you also need to know a lot about business. So, what should you do? Go for a top-notch MBA in finance. Then use your network to do some internships in investment banking. Generally, get the internship experience before you enroll for an MBA or prepare to sit for an MBA entrance. An internship in any investment bank will add tremendous value to your resume and may hire you for a full-time gig.

• Portfolio Manager

If you want to be a portfolio manager, you need to know which tasks or roles the portfolio manager plays regularly. First of all, know that you may be the first person who enters the office as your job starts as soon as the financial market opens. So, once you get in, you need to look for the status of financial markets. You need to be always at the top of current events. It would be best if you also talked to your analyst regularly to get updates about any market development and to understand and discuss the trends of current events that are relevant to your business. Here, you need to realize that the analyst has to be the person who is thorough with his understanding of the market and can do research simultaneously. Because based on your analyst's recommendation, you're going to take a call about whether to buy or sell! Remember, your job is to maximize the wealth your clients' wealth, and you can’t afford to miss out on any new events or any new information that can affect your portfolio.

You, as a portfolio manager, you also need to meet your high-value investors, or you can connect them over the phone. It would be best if you also made sure that you need to conduct interviews with the media during your work. As portfolio managers, normally, you will handle large funds. People who handle small funds are usually called fund managers. So, to handle large funds and leverage them in the market, you need to do some publicity, and at the same time, you need to take responsibility to publicize the firm you work for.

• Investment banking

As an investment banking professional, you need to do three things – Investment Banking pitch book creation, modeling, and administrative support.  Investment banking professionals first concentrate on pitch book creation. The real meaning of a pitch book is creating a presentation with all the data and graphical representation. Your job as an investment banking professional, your job is to be able to convince you to invest in your client's business. So, you need to pitch. The second part of your tasks would be to handle modeling. Especially mergers and acquisitions,  though you may also need to handle another sort of modeling. Lastly, you need to take care of some of the administration. But that’s often not your primary task. So, to summarize, the basic things you need to do in a day are creating a pitch-book and handling modeling.

Portfolio managers normally handle big funds and not small funds. Normally they handle over a billion-dollar of funds and thus earn well. Thus, their lifestyle is often top-notch. They often can afford private jets and a high income. Moreover, they have a better work-life balance than investment banking professionals. They work hard too. They have a high-stress job as they need to reach the office whenever the financial market opens. But they get enough time on the weekend to connect with their family.

In the case of investment banking professionals, their lifestyle is also above average. They work crazy hours, often 16 hours a day, and they often need to spend their nights in the office. Thus, it isn't easy to find time for anything other than investment banking. They see their colleagues more often than their family members. They earn top bucks, but there is no work-life balance, making it difficult for many investment banking professionals to stay at the job for a long time.

For portfolio managers, earning big bucks is natural as they handle big funds and are often appointed as partners in the firm they work for. So they earn top bucks, usually in millions. But few of them who handle funds who manage more than the US $15 billion funds often earn billions. But the lifestyle depends on individual choices and preferences. Portfolio managers, who earn in the billions, often live a simple life instead of buying big jets or bungalows. And few would go out and live a lavish lifestyle. But if you become a portfolio manager, immediately you can't expect a massive downpour of money. It would help if you learned the trade, and then after a few years of experience, you can expect to earn big bucks. Usually, a fresh MBA in finance starts with the US $65,000 per annum plus bonus. But every firm has its own rules and its compensation. So, you need to figure out what you would accept as your first-time offer.

As an investment banking professional, your earnings will sky-rocket once you join. No, you will not earn a million immediately. But, you will learn havoc, often far more than anyone in the finance domain, and that's the reason the investment banking profession has become so popular. But you will have little or no time to enjoy the money you will earn. Ten years down the line, you may expect to earn at least a million in a year on average.

Choose your career based on what you want. It’s prudent not to base your career decision on compensation only. You should incline to get prosperity in your career (not only the prosperity in the sense of money). Step back, think, and then make an informed decision.

Portfolio manager

Pros:

• It’s a job of investment analysis. You will love every moment of it if your knack is in the financial market and how it works.
•  Even if there’s stress on the job, you will have a great work-life balance. The reason is you will spend 12-13 hours a day working, and the rest of the time, you can invest in your family or in a hobby you like.
• As a portfolio manager, you will earn very good money. You won’t earn millions or billions in a year or so, but if you stick to this career, you may become the partner of the firm you work for, which is always a good bet.

Cons:

• Even if you get connected to many high net-worth individuals, you are not always the center of attraction (except for having money). You make your recommendations based on the research done by your analyst.
• If you start your career handling low-funds (under a million or similar), you often get stuck in the hole. Though you shouldn’t be called a portfolio manager, if you handle low funds, you should have a growth mindset, and you need to always prepare yourself for handling big funds like the US $10 billion and more.

Investment Banking Professional

Pros:

• It is a profession where you would be the center of attraction for everything. As you will deal with big businessmen and women and will handle big deals for your clients, you would be the glittering gold in the middle of the crowd.
• You will earn big bucks from the beginning. If you are good, you will earn millions in 10 years down the line. The only thing you need to have is business and corporate finance knowledge.
• You will network with many people and, most importantly, with people who hold very high positions in the organization, like CEOs, CFOs, and MDs. Having a network with high-net-worth individuals will ensure that you will close bigger deals in the future.

Cons:

• There is no work-life balance in this profession. You need to work 16 hours a day and even at the weekend. Very rarely would you be able to see your family?
• Investment banking is not about investment. It’s about raising funds for your clients. Investment banking professionals will mostly work to earn a business deal and handle financial modeling to some extent. Thus, if you are passionate about investments, it’s better than going for portfolio management, private equity, or hedge fund. Investment banking professionals will mostly work to earn a business deal and handle financial modeling to some extent.

This has been a guide to Portfolio Management vs. Investment Banking. Here we discuss the differences between Portfolio Management and Investment Banking and their pros and cons. You may also have a look at the following articles –

• What is Universal Banking?
• Top 10 Best Portfolio Management Books
• Investment Banking Careers
• Investment Banking in Los Angeles Overview