Separation of Analysts from Securities Firms
Name
Institutional Affiliation
Conflict of interest is a situation that arises when the concerns of two parties are different. It may arise in the field of investment where the aim of the analysts collides with those of a particular security firm. A security firm is a company in the business of conducting trade of stocks of a specific client (Burton, Nesiba and Brown, 2015). On the other hand, the analyst’s work includes ranking stocks, developing and trying to maintain the relationship between investment firms and their clients, and doing research and to give reports to support their views.
Conflict of interest is often identified as one of the primary reasons why many analysts are unwilling to issue realistic ratings on the securities covered by them (Burke, Hung, Clift, Garber, & Yoong, 2015). The conflict can arise in two ways. One, agents may choose to pursue their aims and concerns at the expense of clients. The second one is that it may occur when a group within an entity (such as financial analyst) does duties for two parties that have conflicting objectives.
Securities firms are aware of the potential conflicts of interest present in the recommendations of the analysts. The conflict poses a high risk to the decisions of an investor concerning his investments participating in the market (Arand and Kerl, 2015). They may rely on the report of the analyst considering it as that of an expert being unaware of the presence of conflicts of interest.
When investors participate in the marketplace, they assume there is a presence of risk. There is essential support that analysts provide optimistic opinions and forecasts for the securities that are promoted by their own securities firms. The analyst’s views may be wrong; hence, the investor may assume a false degree of risk. The analyst should, therefore, be separated from investment firms to avoid the collision of interests.
References
Burton, M., Nesiba, R. F., & Brown, B. (2015). An introduction to financial markets and institutions. Routledge.
Burke, J., Hung, A., Clift, J., Garber, S., & Yoong, J. (2015). Impacts of conflicts of interest in the financial services industry.
Arand, D., & Kerl, A. G. (2015). Sell‐Side Analyst Research and Reported Conflicts of Interest. European Financial Management, 21(1), 20-51.