I have determined to become a personal financial analyst ever since I chose Economics as my major. I believe this arrangement among personal financial analysts, firms and clients are forming a triangle arragement. Personal financial analysts are the core of the triangular arrangement, connecting firms and clients.
Clients and firms do not always agree with each other, especially regarding with their profits. Clients want financial analysts to work for them as much time as possible but firms want to save their costs and their time in order to maximize their profits. For instance, I have read in a book about financial institutions that financial analysts need about six weeks to find detailed sources in to obtain perfect conclusions; however, firms only give analysts about four weeks to work with a client. In this four weeks, most analysts can only reach approximate conclusions for clients rather than exact results. Some clients are not satisfied with the difference and result in conflicts among these three parties.
In order to resolve this tension, many financial analysts choose to work for extra hours for clients but restrict to their schedules with their firms. This fact might be a big reason about financial analysts always need to be hard working and overloaded. Clients might also be able to pay more money to firms in order to obtain more advanced services from firms and financial analysts.
In my own opinion, I believe there is another way to resolve the problem: set up regulations to regulate both firms and clients. For instance, if there are regulations to decide how many hours in minimum firms need to provide for clients in certain situations. Therefore, there might not be as many conflicts and problems as there currently are.
The triangular arrangement is difficult and confusing. It is possible to implement regulations and make cores to do extra workings in order to resolve the tension.
Let's agree that financial services companies have many employees. Some deal directly with customers (individual investors). Others are more directly involved with trading. Still others, spending most of their time on research, looking for undervalued companies whose stock price should grow. Of the three I'm not sure that the first position would be called an analyst. (My guy calls himself a Financial Advisor.) But it is the first position where the triangle we want to consider is most apparent. The guy who is researching companies all day wouldn't seem subject to the same pressures.
ReplyDeleteOver the years I've had a few of these Financial Advisors. So I can say there definitely can be moral hazard in this relationship. If the Financial Services Company wants to push a particular asset because they have a position in it, then it can wind up in the investor's portfolio, even if the asset isn't a good fit for the company. Alternatively, if fees are generated with each trade, then they have incentive to trade in excess of what maximizes the value of the portfolio. I've experienced each of these
I'm less sure that my Financial Advisors ever put my interests ahead of those of the company. Perhaps that happens for high rollers, who give perqs to the their Financial Advisors. But I haven't seen that.
I agree with you that "financial advisor" might be more appropriate for the job that I described; however, when investment banks recruitment, they use analysts to be general more often.
DeleteMany companies and individuals do not have special talents in financial investments and related fields. Therefore, they might not notice whether their advisors provide them with the most optimal suggestions. Conflicts among them might not be as much as conflicts in other fields that have triangular relationships.
I like your idea about setting regulations for a minimum amount of hours a financial institution should provide for their customers. This type of communication could facilitate alleviation of conflict, since customers know ahead of time how many hours will be spent on them. This way clients can take the risk of not having an exact result with one institution, but could also search for other companies willing to invest more time in their problems
ReplyDeleteI'm not quite sure how financial analyst companies work, but I am going to assume that clientele are a huge driving force behind their profits. So i wonder why they would not want to satisfy the customers as much as possible, because this way they keep them coming back and may get others that these clients refer to the company.