Investment banking and wealth management – what’s the difference?

Suchit Punnose, Founder and CEO of Red Ribbon Asset Management explains the difference between investment banking and wealth management

Investment banking

and wealth management are among the most popular areas for people to work in within the financial sector. And while many terms are often used interchangeably in the finance world, these two refer to very different services.

What is investment banking?

Broadly speaking, investment bankers offer financial advice and services to corporate entities. These include:

• Mergers and acquisitions (M&A).
• Stock splits.
• Buying back shares.
• Initial public offerings (IPOs).
• Bond issues.
• Secondary stock issues.
• Business restructuring.
• Short-term investments for their corporate clients.

They don’t offer these services to individuals.

The finest investment bankers are adept at managing the complex finances of multinational businesses. They are expert negotiators dealing with deals worth billions of dollars and facilitate leveraged buyouts. Their role often includes ensuring clients resist the threat of hostile takeovers. As such it’s a demanding and often fast-moving role.

Investment bankers must have an overarching understanding of the kinds of factors that lead to business success or failure. It’s far more than simply analysing stocks, and they must be real experts in the fundamental mechanisms of businesses. Much of their role revolves around analysing business conditions and formulating the best way to arrange financing or restructuring.

There are two main types of investment bankers:

1. Operations specialists – their role is to execute the services of investment bankers listed above.
2. Account managers – the client-facing side of understanding the needs of the business and ensuring they’re met.

What is wealth management?

Wealth management is all about providing financial services primarily to high-net-worth individuals (HNWI), very high net worth individuals (VHNWI) and ultra-high net worth individuals (UHNWI). For context:

• HNWIs hold financial assets worth more than US$1 billion, excluding their primary residence.
• VHNWI is used to refer to an individual worth at least US$5 billion.
• UHNWIs are the smallest category and are defined as those with a disposable income of more than US$20 million or that hold $30 million in liquid financial assets.

According to the Capgemini World Wealth Report 2020, as of June there were more than 13 million HNWIs in the world. And, according to Knight Frank’s Global Wealth Sizing Model at the end of 2019 there were a total of 513,244 UHNWIs in the world.

However, wealth managers also work with people who are not in these categories. Some work regularly with individuals with assets between $50,000 and $500,000 while other wealth managers will only work with extremely rich clients. Because of the nature of their role, wealth managers tend to work closely with their clients on a one-to-one basis. But what do they actually do?

Wealth managers deal with all aspects of managing their clients’ money, for which they charge hefty fees. The services they supply include:

• Managed account services traded on behalf of the client by the wealth management firm.
• Brokerage accounts that allow clients to access pretty much every investment type.
• Tax planning.
• Estate planning.
• Retirement planning.

Providing these wealth management services is again usually split into two roles:

1. Relationship manager, who deal with the client and find out what best suits them.
2. Investment professional, who is an expert in the best investment options for the clients.

Unsurprisingly, for UHNWIs, there is often a whole team of people from the same firm working on the account.

Summing up the differences between wealth management and investment banking