WHAT I’VE LEARNED ABOUT INVESTMENT BANKS AND CLIENTS — AS A CLIENT

Throughout my decades-long career as a hedge fund manager (of a family office), C-suite executive, and counselor to PE firms, I have worked with a wide range of investment banks — from renowned bulge-bracket firms to small boutique banks, and from major U.S. institutions to smaller, lesser-known firms based in Europe, Asia, and the Middle East.

Ten things I’ve learned about investment banks and clients — as a client:

☐ Paying attention is not enough. Putting yourself into the fabric of the client isn’t an easy feat. For example, knowing executives on an informal basis is one of the most important elements in client relations. However, there is no way to teach this kind of informal work other than to fail a few times. The hurdle everyone faces isn't simply getting noticed but getting believed. Having said that, anything you do repeatedly will get you there. 

☐ Clients prefer teams. Clients consider the teams serving them as direct windows into the capabilities across the bank. The era of the individual virtuoso is declining. This is obvious, but some investment banks don’t seem to get it. Individual heroes should be anonymous. There is no 'I' in a team.

☐ Clients ‘like’ quality work, but they ‘love’ impact. The work of banks should be better than clients expect but not more or less than the situation calls for. Be impossible to ignore. Clients cannot reward those they cannot remember.

☐ Investment banks must never confuse success with excellence. Many banks have enjoyed a lot of the former. Most do not have enough of the latter (Don’t confuse awards with achievement). You can’t argue with excellence. Become bullish on skills, not bonuses.

☐ Clients are human beings, they need stroking and affection. It isn’t necessarily part of the service investment banks offer, but a thoughtfully developed and regular personal dialogue with clients can put a useful, highly positive frame of reference around the work bankers do with them.

☐ Outstanding work is remembered for a year, poor work lingers on for a decade. Message: relatively small client projects are key in terms of reputational impact. It's not the big things that will kill you — it's the accumulation of little things. The essence of investment banking seen through the lens of bankers? Creating ‘referral value’.

☐ Clients admire the ability to mobilize the best of the best. They expect investment banks to be intellectually vibrant, professionally proactive, and continually innovative. Don't spin a story — be a story.

☐ Quite often, the most valuable contributions to clients are not analytically based. The best advice I receive is usually heavily judgmental — and subjective — by nature. Occasionally, they are contributions made simply by asking the insightful question at the right moment. Having all the answers is less important than knowing what to ask. That’s when professionals really shine.

☐ Investment bankers must tell clients the truth. William Blake, the English poet, said it best, “When I tell any truth, it is not just for the sake of convincing those who do not know it, but for the sake of defending those who do.” Make the truth as interesting as it can be.

☐ Investment banks are all about clients, people, and ideas tied together by a collaborative mindset. They have to continually make investments along these four dimensions (echo: all four dimensions). Otherwise, it’s ‘game over’ — fast.

MOTIVATING THE REST BY CHALLENGING THE BEST

Jet aircraft pilots know that a certain deadly combination of airspeed, glide angle, and throttle is a sure-fire recipe for a crash landing. When they’re in this position, just a little more power brings down the nose and accelerates their rate of descent. The pilot’s position is called ‘behind the (power) curve’ because a marginal increase in power does not create the expected uplifting effect.

A number of banks these days find themselves somehow ‘behind the power curve’. Short-term operating results are not adequate, neither is long-term competitive position. More pressure on people does not improve the bank’s performance, instead, the rate of descent accelerates. Interestingly, in that case, banks usually focus on mediocre performers and attempt to bring them up to a certain acceptable level.

Banks should take a different approach. The best individual performers — in most companies — are generally the most strongly motivated. Singling them out should reinforce their efforts to excel and motivate others to aim for excellence, too. Pick out the stars and incite them to achieve even greater things. Set (very) challenging improvement goals for ‘great’ performers. Even ‘good’ performers are inspired by the improvement goals of the best of the best, and their results will also improve. Whatever the response, it must be selective and more than incremental. Pouring on a little more power won’t work.

Group productivity can best be improved not by striving to bring the mediocre players up to speed but by pushing the best to raise their standards of excellence still higher. Enter: mentoring — a highly effective motivator. As a young and ambitious Ph.D. student and already a serious equity trader, I was in awe when I met some of my mentors, Nobel laureates like MIT’s Bob Solow and Princeton’s John Nash. There’s nothing quite like meeting and being challenged by ‘living libraries’. Education is good, but development is better. It’s like putting wings on a B-52.

Three other factors influence the productivity of the bank’s main assets, the best of the best, and, hence, the rest:

☐ Always challenge the status quo. Any bank that does not continuously and systematically challenge long-held assumptions and opinions about its people — often ‘sacred cows’ — is probably missing an opportunity to improve asset productivity.

☐ A clear definition of what ‘extraordinary professionals’ truly are. Without a clear statement that spells out excellent people — including their goals — chances are good that the bank’s main assets will be underutilized.

☐ A strong linkage between the bank’s strategies and the strategies of clients. It is always difficult to ensure high asset utilization if the linkage is weak. Alignment between the bank’s core skills — essentially, the talent of people — and the needs, priorities, and expectations of clients is crucial.

THE POWER OF JUDGMENT IN INVESTMENT BANKING

The power to arrive at a wise decision, or judgment, is crucial, especially in investment banking, which is much more than just a numbers game. Refining one’s judgment is imperative for both individual advancement and the overall success of the firm. Judgment is part science, part art, often influenced by personal inclinations, making it challenging to fully grasp. Despite being a nuanced and iterative process, clients primarily remember the outcomes of an investment banker’s judgment, emphasizing its pivotal role in shaping perceptions and outcomes.

Here are several strategies to enhance the ability to improve one’s judgment:

☐ Leverage past experiences. Past experiences provide valuable insights and help us move beyond relying solely on theoretical reasoning.

☐ Assess the likelihood of outcomes. After reaching a specific conclusion, it’s crucial to question its likelihood by asking, “Is this likely?” If the outcome seems unlikely, it doesn’t necessarily invalidate your judgment. It does, however, warrant thorough scrutiny to ensure accuracy.

☐ Consider alternative options. There is usually more than one way to serve the client — a given set of facts and circumstances can lead to different conclusions. Therefore, it’s essential to evaluate your judgment against various options before committing to one.

☐ Use time and planning. When you anticipate the need to make well-informed decisions ahead of time, you can allocate sufficient time for thoughtful consideration. The outcome? Better judgments.

☐ Develop the ability to recognize valuable judgment opportunities. Seek out opportunities to exercise judgment. Given that judgment improves with practice, it’s crucial to hone the skill — sensitivity — of identifying valuable judgment opportunities; they frequently arise during discussions with clients and colleagues.

☐ Regularly exercise judgment. Similar to any other skill, judgment improves through consistent practice and application. Cultivating good judgment is a continuous process of thought and action.

☐ Prioritize effectively. A critical aspect of judgment entails distinguishing between what is significant (‘signal’) and what is not (‘noise’). Further refinement lies in the ability to prioritize the elements being considered based on their importance.

☐ Ground judgments in facts. The strength of your judgment grows in tandem with the depth of factual understanding. Facts are the servants of rock-solid arguments — and outstanding decisions. Embrace all available facts, especially those that may challenge initial assumptions, to provide optimal solutions for clients.

☐ Seek feedback. Testing your judgment with trusted colleagues — or clients — can reveal opportunities for improvement. Every outstanding professional enjoys the challenge of assessing judgments.

Judgments serve as invaluable elements crucial to the prosperity of an investment bank, shaping the quality of work, client relationships, individual bankers’ effectiveness, firm dynamics, and overall professional fulfillment.

NEVER JUDGE A STRANGER BY THE COLOR OF HIS HAT

In classic Western films, distinguishing the good guys from the bad guys was easy — the villains always wore black hats. Similarly, in the old days of the investment banking industry, competition followed a clear narrative — clients were the good guys, rivals were the bad guys. You aimed to keep your clients happy and gave no quarter to your competitors. The lines were unmistakable. However, in today’s business landscape, competition has become more intricate, blurring the lines between friend and foe. Now, they come in all shapes and sizes, making it challenging to discern who’s who.

Sometimes, however, foes can become friends, e.g., by leveraging skills, professional relationships, and scale economies. It’s important to remember that true competitive advantage lies not just in market share, but in maximizing client value-added. Adopting a ‘share of market’ mindset demands competitive skills, while embracing a ‘share of client value-added’ mindset requires collaborative prowess.

In investment banking, success hinges on achieving the right balance between two key factors — economies of scale (market power) and distinctiveness in terms of value-added services. This trade-off between ‘reach’ (scale) and ‘richness’ (distinctiveness) significantly impacts a firm’s competitive edge. The critical question is how to leverage this ‘reach’/’richness’-dynamic. Investment banks can achieve this by forming strategic partnerships. These partnerships complement and strengthen the firm’s own proprietary assets and capabilities, unlocking new opportunities and maximizing value delivered to clients. Why buying Greenhill when allying is a more effective strategy — for both Mizuho and Greenhill?

Though major strategic partnerships may be strange to most investment banks, such discussions and the complex relationships that develop from them, are nothing new for the vegetable seed industry — for disclosure, I am the vice-chair of one of the leading global players, Rijk Zwaan (in fact, a top 3 global player). We frequently combine a given step in the R&D, marketing, and production process of innovative seeds with external partners or even exchange novel products entirely with peers. These arrangements are particularly prevalent when a step involves high-risk upfront investments. Such collaborations are widespread for a compelling reason: they benefit all stakeholders — including competitors — and ultimately deliver greater value to clients. The entire industry profits from this business philosophy. The vegetable seed industry has maintained gross margins of around 80-85% for decades, largely due to the leading ‘collaborate to compete’ mantra.

The key challenge for many investment banks lies in embracing a new ‘dominant logic’ — shifting from primarily intra-industry competition to a model that also actively leverages intra-industry and inter-industry collaboration. Sometimes, it takes a mental quantum leap to clear a strategic hurdle. Never judge a stranger by the color of his hat.

RELIABILITY, CLIENTS, AND INVESTMENT BANKS

Reliability — the ability to perform the investment bank’s ‘promise to clients’ accurately, consistently, and timely — is the backbone of true professionalism. Every individual contributes to the firm’s reliability since more than one employee becomes involved in the product/service delivery process.

There is an uncompromising relationship between reliability and quality. Reliability is to quality what a key is to a locked door — indispensable. When an investment bank makes mistakes regularly, when it doesn’t keep its promises, clients lose confidence in the bank’s ability to do what it promises dependably, timely, and accurately. A lack of reliability means ‘game over’.

Clients frequently habituate (get used to) certain levels of service such that they are unaware of their true expectations regarding the service of the bank. Clients are more likely to habituate when the bank’s product/service delivery is highly reliable. It’s a tricky psychological process because violations of habituated expectations can provoke dramatic client reactions. For an investment bank, it is important to identify the habituated expectations of clients of whom they may be unaware. In-depth client research delivers the answers.

Investment banks are supposed to be reliable — they are supposed to provide the product or service they promise to provide. The opportunity to go beyond what is expected by the client is dangerous. Exceeding the expectations of clients usually requires the element of surprise. Most clients, however, dislike surprises. ‘Predictability’ (of results, etc) is key. Predictability touches the very essence of what clients expect. The intangibility of the products/services of investment banks heightens clients’ sensitivity to predictability. However, defining predictability in the context of specific client work is no easy feat.

Closely related to reliability is the delivery of ‘minimal’ quality, a threshold quality level. Clients demand — at least — ‘minimal’ (baseline) quality, so it is essential for an investment bank to know what ‘minimal’ quality means for each client. Each client has a different opinion about this threshold quality level. Performing below this quality level means damaging the reputation of the investment bank. Clients are (very) disappointed if investment banks perform below their threshold quality level.

Reliability seems a straightforward concept — you are either reliable or not. However, in practice, it becomes a complex issue because it hinges on client perception. It is the client’s reflection on the specific experience — the performance — and on how well the ‘promise’ has been or is being performed by the investment bank. That said, ‘habituation’, ‘predictability’, and ‘threshold quality levels’ turn reliability into an even more elusive and complex business issue.