What Is an Investment Bank, and How Does Its Role Impact Retirees?

Whether you're already retired or planning for a comfortable retirement, investment banks play a role. Here's how they work and why the success of investment banks ultimately supports your financial success throughout retirement.

What do investment banks do?

Investment banks primarily serve corporations and institutional clients. While they don't offer everyday banking services to individual consumers, the role they play helps make companies, institutions, and government entities more successful.

Image source: Getty Images.

To better understand what an investment bank offers its customers, it helps to break down its three primary functions into "offices."

• Front office (revenue): Includes client-facing roles like sales, corporate finance, trading, and research.
• Middle office (risks): Supports any process related to revenue generation and focuses on risk management and revenue generation.
• Back office (support): Handles administrative tasks that would exist regardless of how much revenue is generated. This includes administrative tasks, record-keeping, compliance, accounting, HR, and information technology (IT).

A one-stop shop

Companies count on investment bankers to guide them through complicated transactions. It could be that they want someone to conduct due diligence on a business they want to buy or help them raise capital. Whatever it is, they can turn to an investment bank for its expertise.

With that in mind, here's a sample of what investment banks do for businesses, institutions, and government entities:

• Offer advice: An investment bank assesses the market, analyzes trends, and advises its clients on their next best move.
• Provide valuation: When one company seeks to purchase another, an investment bank can conduct a business valuation to ensure it doesn't overpay.
• Structure deals: Once a company decides to move forward with an acquisition, the bank can help by advising on how to finance the deal and structure it to meet regulatory requirements.
• Aid with negotiations: As negotiations progress, an investment banker may mediate conflicts or even take the lead. However, the banker's primary job is to look out for the best interests of its client.
• Conduct due diligence: As mentioned, an investment bank will evaluate potential red flags and mitigate risks to the potential buyer.
• Oversee compliance issues: Finally, an investment bank takes the steps necessary to ensure the deal complies with financial regulations.

How investment banks impact you

Investment banks play an important role in the financial ecosystem by ensuring businesses and other organizations have the money and tools they need to prosper. Without investment banks, you'd have fewer successful businesses to invest in, and government entities might struggle under the weight of financial pressures.

By offering these groups everything from research to financial expertise, organizations are in a stronger position to thrive -- a fact that ultimately impacts you as an investor. If you're counting on a retirement account to help finance your senior years, it's good to know that the companies represented in your portfolio have professionals standing by to help them succeed.

The Motley Fool has a disclosure policy.