While financial planners help people develop an overall financial plan, someone has to analyze investment options and provide information about investments to planners and their clients. This is the responsibility of financial analysts, who are also called equity analysts, investment analysts, securities analysts, or research analysts.
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Financial analysts not only provide information used by financial planners and clients but also produce reports for upper management of investment firms to use in making investment decisions.
Analysts obtain data by following industry trends and market movements. They use the data to evaluate current and past investment performance and forecast future performance, often using financial modeling techniques. These techniques use mathematical equations, usually as part of computer software programs, to predict future performance based on past performance. Models must take into account many variables, such as inflation, market volatility, pending regulation, and consumer interest, among many other things, that contribute to gaining a better understanding of a business’s expected financial performance.
To obtain the data needed to formulate financial models and offer thorough analysis, analysts review public filings and records and analyze financial statements specific to the businesses under scrutiny. They look at factors such as past and current earnings, earning potential, liquidity, and general financial strength. To keep up with market trends, analysts also read many company and industry profiles and closely follow current events by reading financial publications.
Analysts also frequently interview managers of publically traded companies to gain a better understanding of internal business operations and the financial standing of the company. Because companies want to appeal to investors, some large companies hire investor relations specialists to work with financial analysts. However, financial analysts are always obligated to provide full and honest disclosure, as all information obtained from a company to be made available to the public must comply with the Securities and Exchange Commission’s Selective Disclosure and Insider Trading rules.
Buy Side and Sell Side Financial Analysts
The two main types of financial analysts are sell side analysts, who provide information to financial services companies that sell stocks, bonds, and other investments to the public, and buy side analysts, who provide services for institutional investors who have a lot of money to invest.
Sell side analysts, also called equity research analysts; provide services for brokerages or other firms that manage individual investment accounts. These analysts use their research to make broad “buy,” “neutral,” or “sell” recommendations to the clients of the firm. Investment firms have a vested interest in retaining analysts whose recommendations are consistently accurate since this helps clients make sound investment decisions that help assure the growth of their investment accounts.
Buy side analysts develop strategies for buying into investments that include hedge funds, independent money managers, insurance companies, mutual funds, pension funds, trusts, and nonprofit entities with large endowments. By researching investments, a buy side analyst can ascertain their probable performance, evaluate how they suit the investment strategy of the investment firm, and then recommend options to firm managers. To prevent competitors from using the information, these recommendations usually stay within the firm, especially at mutual funds and hedge funds. Investment firms want to use their information to try to perform better than competitors so as to draw in more customers.
Expertise Provided by Financial Analysts
The expertise of financial analysts can cover many areas:
- Corporate finance – capital investment decisions, corporate governance, dividend policy, corporate restructuring and mergers and acquisitions
- Derivatives – forward markets and instruments, futures markets and instruments, options markets and instruments, and swaps markets and instruments
- Economics – business cycles, currency exchange rates, effects of government regulation, the monetary system, and market supply and demand
- Equity investments – types of securities, equity markets, equity market valuation and return analysis, and fundamental analysis
- Financial reporting and analysis – the use of Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), plus inventory analysis, debt, taxes, business combinations, and global operations
- Fixed income – analysis of interest rate risk and credit risk, types of fixed-income securities, fixed-income markets, and fixed-income valuation
- Portfolio management and wealth planning – investor portfolio management, for both individuals/families and institutional investors; portfolio construction and revision; and funds such as pension plans and employee benefit funds, mutual funds, exchange traded funds (ETFs), and pooled funds
- Quantitative methodology – time value of money, technical analysis, and correlation analysis
- Alternative investments – commodities, real estate, private equity/venture capital, and hedge funds
Financial analysts often spend their careers focused on a specific type of financial product, specific industry, or specific geographical region. Analysts can also take on specialized roles inside a company:
- Ratings analysts look at the capability of governments and companies to pay their debts. Although credit rating bureaus, such as Fitch Ratings, Standard & Poor’s, or Moody’s, employ many ratings analysts, large institutional investors also hire ratings analysts to do in-house analysis.
- Risk analysts examine the risks and uncertainties of investments and business to assess the risk in portfolio decisions, predict potential losses, and make investment recommendations to reduce potential losses. Some factors that these analysts look at might include the effects that unexpected inflation or pending or possible government regulation would have on an investment.
- Budget, cost, and credit analysts analyze budgets, costs, or credit, usually as one function inside a large financial analysis department.
A select group of financial analysts also work with the news media to provide analysis for television business news programs and with business publications like Bloomberg Businessweek, the New York Times, or the Wall Street Journal. In this role, analysts explain investments to the public, report and analyze financial events, and attempt to provide unbiased opinions about investment options.
Some experienced financial analysts become portfolio managers or fund managers for mutual funds or hedge funds and supervise a team of analysts. Portfolio managers manage a company’s portfolio by selecting its combination of investments. These managers must have the ability to make instant decisions to sell or buy in rapidly changing market conditions. They also represent the company to shareholders at investor meetings by presenting information concerning investment decisions and strategies.
Licensing for Financial Analysts
The main regulatory organization for the securities industry is the Financial Industry Regulatory Authority (FINRA). Approximately 4,540 brokerage firms belong to FINRA, and any person who is connected with a member firm and who buys or sells securities must register with FINRA.
Because financial analysts only need securities licenses if they buy or sell investment products, sell side analysts need licenses more often than buy side analysts. Getting a securities license requires employer sponsorship, and licensees must renew their licenses when they move to another company.
Required licenses depend on the area in which an analyst works. Although many securities licenses are available, the ones that financial analysts are most likely to need include:
- Series 87 – Research Analyst – Regulations
- Series 86 – Research Analyst – Securities Analysis
- Series 63 – Uniform Securities Agent State Law
- Series 7 – General Securities Representative
Educational Requirements and Options
The minimum education to become a financial analyst is a bachelor’s degree. Although many analysts have degrees in accounting, business, economics, or finance, companies that concentrate on biotechnology, engineering, mining, information technology, or other technical industries sometimes choose to hire people who have a related technical degree.
Other education options include:
- Programs that offer a B.S. in Business Administration (BSBA) with a concentration in financial analysis
- Advanced Start BSBA – Financial Analysis
- Graduate Certificate in Financial Analysis for people who already hold an undergraduate degree and decide to go into financial analysis
- Master degrees available include an MBA in Financial Analysis, MBA – Chartered Financial Analyst, Master of Science in Finance – Financial Analysis, and Master of Science in Financial Analysis and Investment Management
Chartered Financial Analyst
Becoming a Chartered Financial Analyst (CFA) by completing the CFA program from the CFA Institute demonstrates a commitment to high professional standards. This graduate-level program is self-study and teaches the skills most needed for investment analysis and decision-making. To qualify for the CFA designation, program participants must pass the three following six-hour exams:
- The Level I exam covers tools and concepts that apply to investment, valuation and portfolio management; basic concepts about asset classes, securities, and markets; and the CFA Institute Code of Ethics and Standards of Professional Conduct.
- The Level II exam covers asset valuation.
- The Level III exam covers portfolio management.
Acceptance into the program requires one of the following:
- A bachelor’s degree or higher
- A minimum of four years of qualified, professional work experience
- A total of a minimum of four years of combined work and college experience (part-time, summer, and internship positions don’t count as work experience)
- Being in the final year of a bachelor’s degree program (Note that program participants cannot register for the Level II exam until they finish their degree or get work experience to meet the entrance requirements of the program.)
Before taking each exam, participants must complete a curriculum, called the CFA body of knowledge (CBOK). This curriculum consists of 18 study sessions that come with six books of about 3,500 pages. Participants take an average of four years to complete the CFA program.
University finance-related programs increasingly include the information required by the CFA exam. The university partners program of the CFA Institute recognizes 132 universities worldwide with a curriculum that includes at least 70 percent of the required CBOK information.
Financial analysts can also pursue other credentials:
- The Association of Certified International Investment Analysts provides the Certified International Investment Analyst (CIIA) designation for financial analysts who work internationally.
- The National Association of Certified Valuators and Analysts (NACVA) offers the Certified Forensic Financial Analyst (CFFA) designation for financial analysts who perform services used in legal proceedings.
- The CAIA Association offers the Chartered Alternative Investment Analyst (CAIA) designation that recognizes expertise in alternative investments, such as commodities, managed futures, credit derivatives, structured products, hedge funds, and private equity.
- The American Academy of Financial Management offers a general certification called the Accredited Financial Analyst (AFA).
Salary and Employment
Financial analysts work for banks, insurance companies, mutual and pension fund brokers, securities brokers, and financial services firms.
As of May 2010, financial analysts in the United States earned a median base annual salary of $74,350, with half of analysts earning between $56,310 and $99,230, according to the Bureau of Labor Statistics (BLS). Also, financial analysts often enjoy sizeable bonuses based on their firm’s financial performance. As an increasing number of individuals invest for retirement, and as investments and financial products become more complex and globally diverse, the BLS expects an increase of 20 percent in the employment of financial analysts during the current ten year period ending 2018.