An advisory firm is an investment bank that provides strategic and financial advice. Occasionally, they have also been referred to as advisory boutiques. Corporations, private equity firms and even governments have enlisted their services in the hope of accumulating more capital.
How do advisory firms work?
Whilst the trading division of an investment bank achieves profit or loss as a result of its market performance, the advisory division is paid a service fee. Once paid, they act as a trusted partner to the paying client, delivering strategic advice on various financial matters.
This is achieved by combining a comprehensive understanding of their client’s objectives, the relevant industries and global markets with a strategic vision to spot and evaluate short and long-term opportunities and the challenges facing their client.
What other activities do investment banks perform?
Strategic and financial advice is the not only activity that investment banks are engaged in, however. Another key area that they work in is company mergers and acquisitions. During these processes, they evaluate the worth of possible acquisitions, helping to find a fair price for each of the parties that are involved.
Investments banks also perform in-depth research of companies, writing reports about their prospects. The knowledge contained in these reports is then used to help various traders, whilst the advice offered by the research might also encourage clients to trade via the investment bank’s trading desk, which generates revenue for the bank.
Famous examples of advisory firms
It’s safe to say that advisory firms have a global influence. Not only have they influenced some of the world’s most high-profile public figures but they are also some of the wealthiest organisations on the planet.
Lazard is the world’s largest independent investment bank. Founded in New Orleans, Louisiana, back in 1848, today it operates from 43 cities across 27 countries in 6 different continents. Taking this into account, it’s not all that surprising that Lazard managed to generate $2.75 billion in revenue last year.
Rothschild & Co
Rothschild & Co is a multinational investment bank and financial services company established in 1810 by the Rothschild family. The company generated nearly €2 billion in revenue and had a net income of €303 million in 2018, giving you an idea of its size and influence. Sir Evelyn Rothschild, former Chairman at the company, is also the personal financial advisor to Queen Elizabeth II.
Despite only being founded in 1995, making it considerably younger than many of the largest investment banks, Evercore Inc. generated $1.4 billion of revenue in 2016. The company was also ranked the #2 investment bank to work for in the 2019 Vault Banking 50.
Issues with advisory firms/investment banks
There are claims of a runaway bonus culture existing in investment banks, which gives investment bankers an incentive to pursue personal gain and not the best interests of their clients.
There is also the issue of rogue trading, an unsavoury practice which is epitomised by the actions of infamous figures like Jerome Kerviel, Nick Leeson and Jordan Belfort, also known as the Wolf of Wall Street.
In addition to this, the banking industry is no stranger to wide-scale corruption scandals and questions whether banks are operating in an ethical manner are still ongoing today.
So, what’s clear with advisory firms is that some will benefit from their actions and others won’t, especially in cases where personal interest has prevailed. With their global influence and large amounts of capital, it’s, therefore, essential for proper regulation to be in place so they can be held accountable if such cases occur.