Arguably, conflict of interest between organizations and individuals are very common given the large number of relationships and transactions that occur in various departments and professionals. As a matter of fact, there is a potential conflict of interest between investment bankers and security analyst working in the same firm. Despite the existence of conflict of interest, there are potential solutions that exist to remedy the situation. If the situation goes out of hand, the firm will have tremendous setbacks. Hence, it the conflict of interest should be addressed. In every organization, ethics play a tremendous role in the operation of the firm. Perhaps, for the sake of the clients’ security analyst and investment bankers need to work harmoniously, and put their differences aside. Undeniably, affiliation among security firms, insurance companies, as well as banks is permissible.
Body
Conflict of interest between security analysts and investment bankers
The conflict of interest between investment bankers and security analyst is ingrained in the entire culture of investment banks. A security analyst has the duty to provide valuation reports, give recommendations, research portfolios, as well as general firm analysis. On the other hand, investment banker act as underwriter and serves both the investing public and the issuer of securities (Marquez & Chen, 2005). An investment banker buys securities from the issuer and trades it to investors and dealers, making profit depending on the selling price and the buying price. Based on what they do, there is a potential for conflict of interest between the investment banker and security analysts, especially if they are working in the same form. In some scenarios, the investment banker and security analysts may have the same information on the performance of a certain company stocks are not performing as the public takes it. Moreover, if the firm retained by the customers then the investment banker and securities analysts may scheme to sell stocks with an intention of making more money for themselves and the firm (Mayo, 2010).
Conversably, companies put a lot of pressure on analysts to ensure that the firm’s stock is positively rated in the public. This will mean that they ensure that the business is taken somewhere else. Hence, this pressure will make the investment banker and security analyst implement other ways of rating positively the stock in the market. Moreover, security analyst in a firm is the matter of both the investment bank and the investors (Sirignano, 2004). Hence, their potential conflict of interest between investment banker and securities analysts based on principal agent problem. In this case, the conflict of interests develops due to self-interest, compensation, firm profits, and asymmetry of information among the two. Therefore, the tag-of-war will exist due to competition and relationship between investment banker and securities analyst in the same firm. If the firm covered by a securities analyst is marketed by investment banker of the same firm, then there is a potential conflict of interest.
Solutions to remedy the situation
Certainly, it is crucial to solve the potential conflict of interest between the investment banker and the security analyst; since, it may cause a big problem to the firm. Due to biasness, which may develop between the two, it is advisable to endure that investment banker and security analyst are allowed to work in an unbiased relationship. The firm needs to categorically state the work of each, and implement guidelines that will govern investment banker and security analyst working in the same firm. The firm should ensure that the securities analysts state the recommendation on the firm stock under no pressure. Moreover, the firm should regulate the recommendations and information given by security analyst. The information existing in the firm should not be socialized, this is because socialization of information has many hidden dangers that may affect the firm profitability (Marquez & Chen, 2005).
Perhaps, the conflict of interest between the investment banker and securities can be reduced by enduring that there is an increase in supervisory oversight on potential issues to conflict. As a matter of fact, mandatory disclosure is not sufficient to constrain conflict of interest in a firm. Establishing proper governance in the firm, which will insulate security analyst from influence the activities of investment banker. The regulations in the firm are also remedies towards conflict of interest between securities analysts and investment banker. In that, these regulations strengthen internal structures meant to restrict the flow of firms’ information to and from bankers and analyst within firm.
Ethics between security analysts and investment bankers in serving clients
Ethics is one of the tremendous factors that guide employees and activities in an organization. In fact, the securities analysts and investment bankers are ethically bound to work together in the best interest of their clients. In every firm, clients play a significant role in the success and profitability achievement. Ethics in firm makes the investment banker and security analysts carry out their activities with an objective of satisfying the client. In fact, ethics drives them towards setting aside their conflict of interest and work towards client satisfaction and firms’ objective. Ethical codes in a firm help them to identify values, who the client is, focus areas, clients objective and demands, which is what the firm is based. The conformation flow is considered crucial and valid when it is bounded by code of ethics that have been stated by the firm. Conflict of interest was working negatively towards attending to the interest of the client. When the client is treated in a way that he/she does not expect, it may harm the existing relationship between firms and the client (Subramanyam, 2004).
Conclusion
It is very difficult to avoid conflict of interest in any firm. Therefore, the conflict of interest between the security analysts and investment banker is unavoidable, especially if they work in the same firm. The potential conflict of interest between these parties may be caused by compensation, flow of information, personal interest, as well as competitions. In this case, the conflict of interest may work positively or negatively to the firm, depending on its impacts. Despite the conflict of interest, the securities analysts and investment bankers should be bound to work together for the sake of the client.
Marquez, R & Chen, M. (2005). Regulating Securities Analysts. School of Business, University
of Maryland
Mayo, H. (2010). Investments: An Introduction. London: Cangage Learning
Subramanyam, P. (2004). Investment Banking. An Odyssey in High Finance. New Delhi:
McGraw-Hill Press
Sirignano, M. (2004). Conflict of Interest between Investment Banking and Stock Analysis. New
York Springer
