Afinancial analyst is aprofessional[1] undertakingfinancial analysis for external or internal clients as a core feature of the job.[2][3][4][5]The role may specifically be titledsecurities analyst,research analyst,equity analyst,investment analyst, orratings analyst.[6][7] The job title is a broad one:[8][9][10][11] In banking, and industry more generally, various other analyst-roles coverfinancial management and (credit)risk management, as opposed to focusing on investments and valuation.
Financial analysts can work in a variety of industries. A large proportion of them are employed bymutual- andpension funds,hedge funds, securities firms, banks,investment banks, insurance companies, and other businesses, helping these companies or their clients make investment decisions.[6] In corporate roles, financial analysts perform budget, revenue and cost modelling and analytics as part of their responsibilities;[10][12][13] credit analysis is likewise a distinct area.[14]
Financial analysts invariably usespreadsheets (andstatistical software packages) to analyze financial data, spot trends, and develop forecasts. The analyst often also meets with company officials to gain a better insight into a company's prospects and to determine the company's managerial effectiveness.
Analysts specializing in advancedmathematical modeling and programming are referred to as "quants"; seeFinance § Quantitative finance for an overview, andQuantitative analysis (finance) § Types for the various roles.
In a stockbrokerage house or investment bank, the Investment Analyst will[3] read company financial statements - applyingfinancial statement analysis - and analyze commodity prices, sales, costs, expenses, and tax rates in order todetermine a company's value and project future earnings. On the basis of their results, theywrite reports and make presentations, usually making recommendations—a "trade idea"—to buy or sell a particular investment or security.
Typically, at the end of the assessment, an analyst would provide a rating recommending or investment action: to buy, sell, or hold the security. Senior analysts may actually make the decision to buy or sell for the company or client if they are the ones responsible for managing the assets. Other, "junior" analysts use the data to model and measure the financial risks associated with making a particular investment decision. SeeSecurities research § Career path.
Usually, financial analysts study a specific industry—called "sector specialists"—assessing current trends in business practices, products, and industry competition.[7] Among the industries with the most analyst coverage arebiotechnology,financial services,energy,mining and resources, and computer hardware, software and services. Analysts must keep abreast of new regulations or policies that may affect the industry, as well as monitor the economy to determine its effect on earnings. As equity analysts divide securities by distinct sectors, companies which fall outside or across multiple sectors are sometimesneglected; the impact on returns (and on "earnings management") here is debated.[15][16]
Analysts also specialize in fixed income. Similar to equity analysts,fixed income analystsassess the value andanalyze the risks of various securities, here focusing oninterest rate- andfixed income securities, particularlybonds. They may further specialize, but here by issuer-type: i.e.municipal bonds,government bonds, andcorporate bonds; the latter specialization is often decomposed intoconvertible bonds,high-yield bonds, anddistressed bonds; some coversyndicated loans. The reporting focuses on the ability of the issuer to make payments—similar to the credit analysisdescribed below—but also on therelative value of the security in question, and in context of the overall market andyield curve. SeeFixed income analysis.
Analysts are generally divided into'sell-side' and'buy-side'. The buy-side is sometimes considered more prestigious, professional, and scholarly, while the sell-side may be higher-paid and more like asales and marketing role. It is common to begin careers on the sell-side at large banks then move to the buy-side at a fund.
Typically, analysts usefinancial statements analysis, including accounting analysis andratio analysis, but also consider overall economic situation and specific factors including interest rates, employment, production, management and tactical evaluation of the market environment. Analysts obtain information by studying public records andfilings by the company, as well as by participating in publicearnings calls where they can ask direct questions to the management. Additional information can be also received in small group or one-on-one meetings with senior members of management teams. However, in many markets such information gathering became difficult and potentially illegal due to legislative changes brought upon by corporatescandals in the early 2000s. One example isRegulation FD (Fair Disclosure) in the United States. Many other developed countries also adopted similar rules.
Analyst performance is ranked by a range of services such as StarMine owned byThomson Reuters or Institutional Investor magazine. Research byNumis found that small companies with the most analyst coverage outperformed peers by 2.5 per cent — while those with low coverage underperformed by 0.7%.[17]SeeNeglected firm effect.
Financial analysts in theinvestment banking departments of securities or banking firms often work in teams, analyzing the future prospects of companies, and selling shares to the public for the first time via aninitial public offering (IPO), orissuing bonds; this task is often identical to that of a securities analyst. On this basis, they will then make presentations to prospective investors re the merits of investing in the new company, presenting their "pitch books" on a "roadshow"; seebookrunner andsecurities underwriting. An additional component of the IB role here: analysts ensure that all forms and written materials necessary for compliance withSecurities and Exchange Commission regulations are accurate and complete.
Many IB analysts work inmergers and acquisitions (M&A) departments, similarly preparing analyses on the costs and benefits of a proposed merger or takeover, and assisting withregulatory submissions; here there are both buy-side- and sell-side analysts. SeeChinese wall § Finance. The analysis is somewhat more specialized than for an IPO, as it must considervaluation pre- and post-merger, a function of efficiencies, synergies, or increased market share,financing employed, including M&A specific considerations such as theswap ratio, andtax optimization, both re the transaction and for the new entity.[18]
At more senior levels,[4]vice presidents (VPs) or Senior VPs will manage the workflow and deliverables—with modelling performed by Associate VPs—but not be involved in the line-by-line detailper se.Directors will be responsible for"rainmaking" and maintaining existing client relationships. The latter role incorporates a significant advisory element—guiding the client regardingtheir profile and exposure in thecapital markets, andadvising on M&A and other corporate activity[19] (and liaising withsales and trading).
Investment banks, and large trading houses, often employ aneconomics team or group, led by achief economist. This team produces theeconomic forecasts informing the various valuations and overallinvestment strategy;[20] seeInvestment banking § Research andEconomic analyst.
Within banking, there are other non-quant analyst roles (not necessarily titled "financial analyst"), mainly within the"middle office"; these are generally linked, at leastby dotted line, to both the Finance and Risk Management areas.
These areas, together with the various dedicatedRisk Groups, allow the Finance department to advise senior management regarding the firm's global risk exposure and the profitability and structure of the firm's various businesses; seeFinancial risk management § Banking.
Acomptroller (or financial controller) is a senior position, responsible for these analyses andinternal control more generally, usually reporting to the bank'schief financial officer, as well as copying thechief risk officer.
As outlined, the job title is a broad one, and analyst-roles also includefinancial management and (credit) risk management.
Financial analysts within corporates[3][21][22] provide inputs into all elements of the firm's financial management.[23][9][12]
Management of these deliverables sits with thefinancial manager (FM); whilebudget analyst,cost analyst,treasury analyst /manager,risk analyst /manager andcorporate finance analyst are often specialized roles. The area overall is sometimes referred to as "FP&A" (Financial Planning and Analysis).[23][22] Thefinancial director orchief financial officer (FD, CFO) has primary responsibility for managing the company's finances, including financial planning, management of financial risks, record keeping, and financial reporting.
There are several analyst roles related tocredit risk, macro or micro.[14]Ratings analysts (who are often employees ofratings agencies), evaluate the ability of companies or governments that issuebonds to repay their debt. On the basis of their evaluation, a management teamassigns a rating to acompany's orgovernment's bonds.
Financial analysts employed incommercial lending perform balance sheet analysis, examining the borrower'saudited financial statements and corollary data in order to similarly assess lending risks, and to confirm thatyield is appropriate given risk; this task is both upfront and on a monitoring basis thereafter. The focus is on current and forecasteddebt- andliquidity ratios generally, and specifically those related to anyloan covenants, such asdebt service coverage ratio (DSCR) andloan-to-value ratio (LTVR).
Inretail banking,credit analysts build models to determine an applicant's creditworthiness, assign an initialcredit score, and monitor this and the loan on the basis of an ongoing"behavioral" score. In this and the previous role,impairment- andprovision-modelling are a prominent deliverable (seeIFRS 9); theprobability of default (PD),exposure at default (EAD) andloss given default (LGD) statistics or models are (often) provided by a separate (but dedicated)credit-quant team.
Some financial analysts specialize asaccounting analysts; they will collect industry data (mainly balance sheet, income statement and capital adequacy in banking sector), merger and acquisition history and financial news for their clients. They then typically "standardize" the different companies' data, facilitatingpeer group analysis: the main objective here is to enable their clients to make better decisions about the investment across different regions. They also provide the abundance offinancial ratios calculated from the data gathered from financial statements, and possibly other sources.
In general,[9][5]abusiness-related bachelor's degree majoringin Accounting,in Finance, orin Economics is a minimum requirement for an entry or junior role. Given the nature of the work, (some) proficiency inExcel is typically a recommendation (and analysts may be expected to learndatabase software "on the job");[21][3] see further underFinancial Modeling.
With seniority, often, analysts are expected to earn anMBA,[3] having gained 2–3 years experience in the junior role. Increasingly, it is preferred that, even to enter, analysts hold aMaster of Finance degree.[25]
Morespecific qualifications may be required additionally:[9]
In securities and IB roles,[6] it is lately preferred that, similarly, even to enter, analysts earn a Master of Finance or theCFA designation—in Europe, theCIIA also—with the MBA still common at senior levels.
Often, there are also regulatory requirements. For example, in the United States, sell-side or Wall Street research analysts must register with theFinancial Industry Regulatory Authority (FINRA). In addition to passing theGeneral Securities Representative Exam (Series 7), these candidates must pass theResearch Analyst Examination (Series 86/87) in order to publish research for the purpose of selling or promoting publicly traded securities.For other jurisdictions, seeList of securities examinations.
For sector specialists—with approximately five years industry experience—less weight is placed on finance qualifications, as a relevant advanced degree or qualification in the field is often necessary.[30] (They will later be encouraged to earn theCFA, CIIA, or MBA.) For example,valuing financial service firms andvaluing mining corporates requires specialized knowledge regarding theirvaluation-, regulatory-, andaccounting standards; and, respectively, qualifications inactuarial science,[31] andmining engineering orgeology[32] will then be required.Other sectors may similarly require specific technical qualifications: e.g.in pharmacy /life sciences for"bio-tech";[33] inelectronic engineering for (some) areas in "high tech" (e.g.semiconductors).[30]
Many large teams will also include aCPA orCA in a dedicated technical role. (Inthe Commonwealth, the CA qualification is often sufficient to access (junior) analyst roles.[34]) Banks often also recruit analysts withaccounting qualifications to the middle office roles. The economics team is usuallyled by aPhD in the discipline, while amasters in economics is the typical requirement to join the team.
| International | |
|---|---|
| National | |
