How To Manage Risk As An Investment Banker

When you begin your investment banking career, regardless of the prior experience, you will almost instantly start earning an above-average salary. After all, investment bankers remain one of the most highly compensated professionals. Expectedly, however, they handle an enormous amount of responsibility toward both their employers and clients. Just consider the fact that eFinancialCareers classifies this career as the most stressful one in the entire finance sector.

To attain longevity, you must find a way to overcome this anxiety and pressure. Not doing so would lead to burnout, which is one of the main reasons for career changes. Luckily, there are many ways that you can make your job more enjoyable and avoid falling victim to the common pitfalls of investment banking. One of the most successful solutions is to manage risk properly.

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So, what are some of the best ways to minimize exposure and build long-lasting relationships with your clientele?

Diversify the Portfolio

As the vast majority of investors know, the most important step towards achieving a stable stream of passive income boils down to diversification. In simple terms, this translates to investing in a wide variety of asset types and in various different industries and locations. Doing so ensures that your portfolio is not overly concentrated on one particular market and limits the exposure that you would have in case of a downturn. For example, if most of your investments are allocated into tech companies, you are running an enormous risk of losing money when there is a new development wherein innovation facilitates obsolescence.

A great illustration would be advisors who had a lot of their clients’ capital invested in the mobile phone company Nokia in the late 2000s. Given that this is when Apple and Samsung took over the market, Nokia’s stock price plummeted, and most investors had tremendous losses that could never be recouped. Thus, the first step that you should take is developing an investment strategy that is founded on an even spread of assets from various industries, geographic locations, risks, and aggression levels.

Set Proper Expectations

According to Charles Vaccaro, the President of Sunny Isles Capital, LLC, one of the leading factors that contribute to the stress levels of investment bankers is setting unrealistic expectations. This comes as no surprise given much of investment banking requires balancing the risk you take on with the potential for growth. Consequently, successful investment bankers are those who can properly set and manage expectations, striking the proper balance between risk and reward.

To protect yourself from potential liability if you work with client money, you should remain as transparent as possible. In other words, disclose the exact expectations with every client, regardless of whether they have already entered into a professional relationship with you or not. Also, although most investment banking institutions have mandatory practices within this area, ensure that your contracts protect you from unforeseen circumstances. That means that you should establish clauses that demonstrate your limited liability in situations that you have no control over.

Charles Vaccaro of Sunny Isles Capital effectively navigates the minefield of client expectations by instead investing his company’s own capital, thereby eliminating the need for managing various stakeholders. This can be especially helpful for managing expectations, as its incomparably simpler to manage a single set of internal guidelines than to keep a group of independent investors on the same page with a particularly risky investment.

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Strategically Manage Associates

Although your main focus should be on the management structure of the companies in your portfolio, they are just one of many groups of people that you will work with. You must also interact with a plethora of external and internal brokers, administrators, financial institution representatives, market researchers, other investors, seniors, and subordinates. Just consider the amount of personnel that will be engaged in a simple OTC stock purchase, per se.

Since these stocks do not appear on any of the main exchanges, you’ll need to have ready access to someone who is able to complete sales and purchases on your behalf and in a timely manner. A difference of an hour could turn a profitable sale into a net loss.

Do Not Negotiate Your Margin of Safety

The greatest fear that most people who work as an investment banker have is losing money. This is quite understandable when one considers that they are placing a great deal of money into the uncertain hands of another company. It is also why you must set clear guidelines on your margins of safety for every single investment. As per Charles Vaccaro, determining the actual percentage will depend on a ton of factors that differ across many industries.

When you invest in highly aggressive stocks that may come from companies like Amazon, Facebook, or Google, hypothetically, you will need to have a higher margin of safety than when you are buying governmental bonds. So, you need to understand that the security’s value and price are seldom, if ever, in perfect sync. Instead, there is usually a discrepancy between the two numbers. Obviously, your goal should be to purchase securities that have a higher value than price, which constitutes the margin of safety that will protect that investment from unpredictable drops.

When using more complex forms of investment such the use of convertible notes, a strategy frequently employed by Charles Vaccaro’s firm Sunny Isles Capital, your margin of safety will be much different. These investments require a totally separate risk analysis to determine if the investment is worthwhile, and a successful investment banker will know that an occasional loss in this field is inevitable. The trick is to maintain an overall level of risk that ensure the net growth of the entire portfolio despite a loss on some individual investments.

Adjust Timelines

Ultimately, consider spreading or shortening your timelines to decrease the risk. If you expect to earn an unrealistic amount of gains within a year, you may find yourself over-investing in risky assets to meet those expectations. Albeit a strategy that has worked for some people, think about changing the timeline instead. Do not let stories about investors who mortgaged their house to invest in bitcoin before the boom sway you from maintaining a healthy foundation of patient investments. That is the key to long term success.