Financial Analysts: Types and Conflicts of Interests
Performing thorough research into an asset or a company that you want to buy requires time and there are truckloads of information to dissect. This is where you can find ProfitiX Broker financial analysts’ services to be useful. Here are some of the basic things you need to know about analysts: their types and the conflicts of interest that they face.
Types of Analysts
Buy-side analysts serve for large institutional investment companies like mutual funds, hedge funds, or insurance companies. These analysts provide recommendations on securities in the accounts of their employers.
Buy-side analysts focus on particular sectors or securities with which their company has interests. The reports that they give are usually for internal use.
Sell-side analysts are generally employed ProfitiX Trading Platform under broker dealers and investment banks. Thus, they are also a part of the retail investment division. The recommendations and ratings that come from them are created to sell an investment and are often given free to the clients of the brokerage firm.
These analysts are not employed or linked with any brokerage firm or fund companies. independent analysts’ goal is to offer unbiased and objective ratings.
Independent analysts receive compensation either from companies that they research, which is called fee-based research, or by selling reports that are based on subscriptions.
Conflicts of Interest
Investment banks are financial institutions that perform services like underwriting. They can also be intermediaries between the issuers of securities and the investing public.
Basically, when a company tries to go public, it will use the services of an investment bank to help facilitate the process and sell the new securities to investors.
Conflicts interest arise in the following situations:
- If an analyst is working for the same investment bank that is underwriting a new issue, this analyst may be compelled to give a positive recommendation to ensure that the offering is successful.
- Investment banks are similar to many other businesses, which are always trying to increase profits. They usually issue favorable reports about their clientele, and these reports keep existing client companies happy, thus repeating business.
Brokers usually generate revenues from the commissions linked with the buy and sell transactions done by the account holders. Even if these brokerages don’t charge for the research report that they do, they are still a profit-seeking organization.
In other words, the ultimate goal of their research is to create customer interest in a certain stock, and this thing results to more transactions.
Compensation is directly based on the number of new investment banking deals facilitated by the analyst’s reports. Also, the profitability of the investment bank in general can put some pressure on the analyst for him/her to issue positive reports and recommendations.
The employees of an investment bank may own the stocks that they are recommending. They can do this through a pooled stock purchase or even direct ownership.
Therefore, the analysts may think twice when issuing poor reports or recommendations on a security that they own because it could impact their personal profits.
The US government and the Securities and Exchange Commission have set up regulations that clamp down on the various conflicts that analysts face.