Investment bankers assume a great deal of risk through their underwriting and market activities, even after they conduct careful market analysis and perform numerous financial calculations. In a sense, high-level investment bankers have the ability to influence the future path of the economy through their handling of mergers and acquisitions, and underwriting activities.
Investment bankers are risk takers as soon as they enter this competitive job market. Success as an investment banker relies on variables, some within their control and some outside of their control. For instance, an investment banker can control some of their future potential by obtaining a degree, typically an MBA with a focus in finance. The risk comes when you consider the variables they can't control. This can include outcomes related to economic uncertainty, poor or inaccurate data sets, and new regulations and restrictions imposed on the investment banking industry.
An investment banker assumes risk during all interactions, including those related to securities and mergers. In addition, investment bankers often take on the added risk of developing new investment products and strategies. These new investment products and strategies are often proprietary and are based heavily on historical financial data. In an effort to become a market-leader and reap the benefits of a proprietary product, investment bankers assume the initial risk related to an untested investment product.
Part of the inherent risk that investment bankers confront on a daily basis includes those related to a diverse client base. This can lead to a conflict of interest and possible situations where one client may benefit at the expense of another client. Investment bankers also assume risk related to trading and merger activities in which they assume the principal credit of the client over the short-term. Transaction processing delays, market disruptions and an overall deterioration in pricing can expose an investment bank to potential losses.
The investment banking industry ties the compensation of investment bankers to performance. This in and of itself, provides an incentive for investment bankers to assume more risk than a traditional banker may be willing to assume. In addition, investment bankers are exposed to general industry risk that arises from the loss of confidence in an investment bank's ability to meet collateral needs. This can lead to a loss of consumer confidence and a downturn in investment opportunities.
- Princeton Review: Investment Banker
- Standard & Poor's; Industry Risk for Investment Banking is Generally Higher than for Other Financial Institutions; January 2011 (PDF)
- Stanford University; The Making of an Investment Banker: Stock Market Shocks, Career Choice, and Lifetime Income; Paul Oyer; December 2008 (PDF)