How to Become a Financial Analyst
Financial analysts are also known as investment analysts, securities analysts, research analysts, and equity analysts. They are financial market experts that evaluate investment options and present reports used by upper level business management to make sound investment decisions. Analysts work for banks insurance companies, mutual and pension fund brokers, securities brokers, and financial services firms that provide consulting, advisory or research services.
Financial analysts follow market movements and industry trends to assess the performance of investments and analyze data used to forecast future performance. This is done by reviewing public records and filings, and analyzing financial statements of businesses to determine their earnings, liquidity, earning potential, and overall financial strength. Staying current on market trends also involves spending a lot of time reading industry and company profiles, as well as following current events closely in financial publications.
Analysts often go straight to the source and interview a company’s management for a better picture of their internal operations and financial standing. Companies are eager to attract investors and often have professionals who specialize in investor relations to work closely and directly with financial analysts. This is all done with full transparency, as the Securities and Exchange Commission’s Regulation FD requires that when a company provides any outside party material nonpublic information, the information must then be made public.
Financial analysts practice financial modeling, which involves using mathematical equations to predict future performance based on past performance taking variables such as inflation into account. Most all modeling is done using software programs developed for this express purpose.
Education and Degrees
Financial analysts hold bachelor’s degrees at minimum, often in business, accounting, finance or economics. Companies that focus on technical industries, such as engineering, information technology, mining, or biotechnology, sometimes prefer to hire applicants with a related technical degree, such as computer science, engineering, physical science, or biological science.
Some B.S. in Business Administration (BSBA) programs offer a concentration in financial analysis. Also available is an Advanced Start BSBA – Financial Analysis. Someone who already has a bachelor’s degree and develops an interest in financial analysis might choose to pursue a Graduate Certificate in Financial Analysis. For advanced education, a number of master degrees, which are common among senior financial analysts, are available including:
- Master of Science in Finance – Financial Analysis
- Master of Science in Financial Analysis and Investment Management
- MBA in Financial Analysis
- MBA – Chartered Financial Analyst
Areas of Expertise
Financial analysts are extremely valuable to the businesses that retain them as they master many areas of expertise:
- Corporate finance– corporate governance, dividend policy, capital investment decisions, mergers and acquisitions and corporate restructuring
- Equity investments– types of equity securities, equity markets, fundamental analysis, and equity market valuation and return analysis
- Fixed income– types of fixed-income securities, fixed-income markets, fixed-income valuation, and analysis of interest rate risk and credit risk
- Derivatives– forward markets and instruments, futures markets and instruments, options markets and instruments, and swaps markets and instruments
- Alternative investments- real estate, private equity/venture capital, hedge funds, and commodities
- Portfolio management and wealth planning– management of individual/family investor portfolios and of institutional investor portfolios, pension plans and employee benefit funds, mutual funds, pooled funds, exchange traded funds (ETFs), and portfolio construction and revision
- Quantitative methodology– time value of money, correlation analysis and technical analysis
- Economics– market forces of supply and demand, business cycles, the monetary system, currency exchange rates, and effects of government regulation
- Financial reporting and analysis– International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), plus analysis of inventory, long-lived assets, taxes, debt, business combinations, and global operations
Buy Side Versus Sell Side Financial Analysts
There are two major classifications for financial analysts: buy side analysts, who develop investment-buying strategies, and sell side analysts, who work with securities dealers that sell stocks, bonds, and other investments.
Buy side analysts work for companies with large amounts money to invest. These institutional investors include mutual funds, hedge funds, insurance companies, trusts, pension funds, independent money managers, and nonprofit organizations with large endowments. Buy side analysts research investments to determine their potential and how well they fit into the company’s investment strategy, and then make recommendations to accordingly to the company’s money managers. These recommendations are usually kept between analysts and company management and financial officers. This is particularly true of mutual fund and hedge fund investment management companies, as it keeps competitors from having access to the same advice while the investment company attempts to outperform its competitors and attract more customers.
Sell side analysts work for brokerages or other firms that manage individual investment accounts. These analysts issue broad blanket recommendations to the clients of the firm, such as “buy,” “neutral,” or “sell.” Analysts want these recommendations to influence the buying decisions of the firm’s clients and, potentially, attract new clients by consistently producing accurate recommendations. Sell side analysts are often called equity research analysts.
Financial analysts usually specialize in a specific industry, region or type of financial product like stocks, bonds, funds or real estate. They also specialize in terms of the specific roles they have within an organization and go by a number of different titles that distinguish their specialized roles:
Risk analysts study the uncertainties and risks of business and investments. For example, what effect could unexpected inflation have on an investment? What about pending or possible government regulation? Risk analysts evaluate the risk in portfolio decisions, predict potential losses, and recommend investment decisions to limit potential losses.
Ratings analysts evaluate the ability of companies or governments to pay their debts. These analysts often work for credit rating bureaus, such as Moody’s, Standard & Poor’s, and Fitch Ratings, but may also work for large institutional investors who want to perform their own analysis.
Budget, cost, and credit analysts focus on analyzing those specific areas. These are usually specialized functions within the context of a large financial analysis department.
Another job opportunity for financial analysts is with the business news media, reporting on and analyzing financial events, explaining investments to the public, and offering unbiased insight on investment options. Reporting analysts educate the public and industry insiders alike through publications like the New York Times, Bloomberg Businessweek and the Wall Street Journal.
Experienced financial analysts can become portfolio managers or fund managers for hedge funds and mutual funds. Portfolio managers are responsible for selecting the mix of products, industries, and regions for a company’s overall investment portfolio. Portfolio managers supervise a team of analysts. These managers need to be able to make decisions on-the-spot to buy or sell when market conditions change rapidly. They also act as company representatives to shareholders who make presentations about investment decisions and strategies at investor meetings.
Financial Analyst Licensing
Any analyst involved in buying or selling investment products needs the appropriate securities licenses. For this reason sell side analysts are more likely to need licenses than buy side analysts. Securities licenses require sponsorship by an employer and must be renewed when a licensee moves to a new company.
The Financial Industry Regulatory Authority (FINRA) is the primary securities industry licensing organization. The FINRA has about 4,540 member brokerage firms and requires registration of any person associated with one of those firms who is involved in the securities dealings of the firm. Licenses are issued based on an analyst’s area of specialization.
The more common securities licenses required by financial analysts are:
- Series 7 – General Securities Representative
- Series 63 – Uniform Securities Agent State Law
- Series 86 – Research Analyst – Securities Analysis
- Series 87 – Research Analyst – Regulations
Chartered Financial Analyst
The premier credential for a financial analyst is Chartered Financial Analyst (CFA) available through the CFA Institute. The CFA Program is a graduate-level self-study program that requires passing three six-hour exams in sequence. When a person signs up for an exam, they receive a curriculum, know as the CFA body of knowledge (CBOK), of 18 study sessions along with six books totaling about 3,500 pages. On average, the program requires four years to complete. The CFA program also emphasizes, and requires applicants to agree to a Code of Ethics and Standards of Professional Conduct.
Increasingly, knowledge required by the CFA exam is included as part of university programs. The CFA Institute has a university partners program that recognizes 132 universities worldwide that have added at least 70 percent of the required CFA body of knowledge to their curriculum.
To register for the CFA program, an applicant must meet one of the following requirements:
- Have a bachelor’s degree or higher
- Be in the last year of a bachelor’s degree program (However, applicants must complete their degree or obtain work experience that meets the program’s entrance requirements to register for the Level II exam.)
- Have at least four years of qualified, professional work experience
- Have a total of at least four years of combined work and college experience (work experience does not include summer, part-time, and internship positions)
Learn about the differences between CFA’s and CPA’s here.
Although the CFA is the most sought-after credential, other credentials are available:
- Financial analysts involved in financial analysis used in legal proceedings may want to become a Certified Forensic Financial Analyst (CFFA) through the National Association of Certified Valuators and Analysts (NACVA).
- Financial analysts who work internationally may find the Certified International Investment Analyst (CIIA) from the Association of Certified International Investment Analysts useful in advancing their careers.
- Accredited Financial Analyst (AFA) from the American Academy of Financial Management is a general credential.
- Chartered Alternative Investment Analyst (CAIA) from the CAIA Association recognizes alternative investment expertise. Alternative investments include hedge funds, commodities and managed futures, private equity, and credit derivatives and structured products.
Salaries and Career Outlook
The Bureau of Labor Statistics (BLS) expects job prospects for financial analysts to increase by 11 percent between 2016 and 2026. This trend is attributed to the fact that investments and financial instruments are becoming increasingly complex and globally diverse.
Big Data is also having a major impact on how financial analysts approach complex tasks, providing an ever wider and deeper range of data points to consider as businesses look for new opportunities, both in investments and in the consumer marketplace.
The BLS reported that as of May 2018, the median base salary for financial analysts was $85,660, with the top ten percent earning more than $167,420. Financial analysts often receive significant bonuses, stock options and other incentive pay based on their individual performance and the company’s earnings.
The top paying industries for financial analysts in 2018 were (median annual salary):
- Financial services – $101,410
- Professional, scientific and technical services – $84,540
- Company and enterprise management – $83,640
- Credit intermediation – $81,420
- Insurance providers – $78,870