Asset Management vs Investment Banking – Differences That Matter

Asset Management vs Investment Banking – what exactly are the differences between these two important pillars of Finance? And why do these differences actually matter? Let’s find out.

The world of finance is full of words that you might think to mean the same thing. But you’ll find that often isn’t the case.

Words like income and revenue are found all over earnings statements.

They sound like they should mean roughly the same thing, but one is completely different from the other in the eyes of financial analysts.

One of the often-misunderstood concepts that beginners to investing struggle with is how asset management differs from investment banking.

You might think that investment and assets are essentially the same things, and you’d be right in some cases.

However, as with many things in finance, specific terms have very specific meanings.

And whether you’re looking at one or the other as a client or as a career seeker…

It would certainly help to know the difference between asset management and investment banking.

In order to know that, we need to start by explaining the concepts of “buy-side” and “sell-side” in finance.

Buy-side vs. Sell-side

One can think of practitioner finance as being made up of two parts:

• buy-side, and
• sell-side

While finance is its own sector of the market, the buy-side and the sell-side are supported by completely different kinds of businesses and clients.

And the two sides make their money in completely opposing ways.

As you might have guessed, the “sell-side” sells to the “buy-side.”

The Buy-Side

So, what exactly is the “buy-side”?

The buy-side refers to those who buy any securities for the purpose of investment and fund management.

Anyone who buys and sells securities through exchanges, brokers, or investment firms would be considered on the buy-side.

The investment firms themselves would even be considered on the buy-side (even though they sell to investors).

They must purchase securities from the sell-side in order to distribute them to investors.

The Sell-Side

The sell-side is represented by the investment banks that:

• package new products,
• list new stock, or
• otherwise raise capital for corporations that use that capital to fund new projects.

The sell-side is generally hired by corporations to create the securities that are then sold to the investment firms and fund management institutions.

Those companies then distribute the securities to the broader market.

In many cases, these securities are then bought or otherwise consumed by all kinds of investors.

Asset Management Definition

The reason for starting with explaining the buy-side and sell-side is that the subjects in the next two sections belong to one or the other.

Companies who offer their clients asset management are responsible for accepting money from their clients and investing it so that their clients see positive returns.

Asset managers are part of the buy-side because they buy securities from investment banks and distribute them either:

• directly to clients, or
• by packaging several different securities into pooled funds

These types of funds are also called mutual funds.

Many of the companies on the buy-side, such as Vanguard and Fidelity, are relatively well known.

While individual investors are certainly clients of theirs, corporations, high net worth individuals, and smaller family investment offices are typically their focus.

Asset managers must conduct indepth analysis of all available products and understand the market sentiment in order to figure out the best securities in which to invest their clients’ money.

That might include equity investments like:

• single stocks or stock mutual funds,
• fixed income securities like corporate or government bonds, or
• other securities like real estate, stock options, or futures, etc.

Futures, options, and other derivative securities tend not to be offered to regular clients due to the risks involved.

Understanding how this part of the industry works can be critical to regular investors as well, however.

Whether you’re a new investor or are a high-net-worth individual looking for more clarity about your investment options…

Seeking help is always suggested as you can easily be led astray by blindly following the advice of asset managers.

Investment Banking Definition

Investment banks are the primary players on the sell-side.

They provide services to corporations that require additional capital from investors in order to fund new projects.

Put another way, investment banks are the gateway between corporations – either private or public – and the buy-side where investors are willing to provide the capital.

The big names in the investment banking world include names you might have heard of before such as Goldman Sachs, JP Morgan, and Morgan Stanley.

They provide services such as:

• issuing corporate bonds,
• underwriting new securities on the stock exchanges,
• mergers and acquisitions, and
• initial public offerings (IPOs) of companies wishing to “go public”.

While investment banking is an enormous profit center for those banks who have the reputation for those services, it might confuse some investors to learn that those same banks – Goldman Sachs, JPMorgan Chase, etc. also offer service on the asset management side of the business.

So, in other words, some of these banks are on both the sell-side and the buy-side.

Asset Management vs. Investment Banking – For Clients

This section is meant to clarify a point that may be confusing you, and that is the point that corporations are clients of both the buy-side and the sell-side.

In order to differentiate the two services, it’s important to understand what the goals are.

If corporations are looking to raise new funds by selling securities to investors, they are utilizing the services of the investment banking companies on the sell-side.

If the corporations are looking to manage investments, either for the corporation itself or for its employees as 401(k) or other retirement benefits, they would be using the asset management companies on the buy-side.

Asset Management vs Investment Banking – For Career Seekers

While we’ve been focusing on the differences between asset management and investment banking in terms of the services they offer to the finance world, these two parts of the industry offer some of the most sought-after career paths in the world.

This is, of course, mostly due to the ludicrous amounts of money that can be made by those who prove successful in their chosen path.

Junior-level positions in asset management might generally yield lower salaries than the same level in the investment banks.

But senior-level asset managers can bring salaries and bonuses far above their counterparts at investment banks.

A Masters degree that at least focuses on Finance is typically required before even considering a junior-level position.

However, the prevalence of online finance and investing courses coupled with on-the-job training has meant many employers are removing the formal education criteria for recruitment.

This holds true for both asset management and investment banking.

After graduation, nearly all new-grads will have to grind through at least 2-5 years before making it through the “weed-out” period where the hard work tends to drive most people to find other career paths.

At the end of the day, the asset management route tends to be the better choice simply because of the typical workweek requirements.

Junior positions in asset management tend to work 40–60-hour weeks, and they even have weekends off since the markets are closed.

Investment banking analysts and associates will find it’s not uncommon to work 80-100 hours per week, including weekends.

What’s Next: Asset Management vs Investment Banking

The most important difference between asset management and investment banking is the “side” of the market they are found on.

Asset management is on the buy-side because they purchase securities from the sell-side and distribute them to investors.

Investment banking is part of the sell-side because they sell securities to the buy-side in order to help corporations raise capital for new projects.

The services offered by one or the other are dependent on the goals of the clients, but some players on the sell-side can also offer services to the buy-side, although they would be in different departments within those companies.

If you hope to find a career in either of these professions, you will need to get yourself by getting a solid background in finance and prepare for a difficult few years of gaining seniority.