Understanding Analyst Performance Measurement: Six Steps

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According to Lata Prabhakar, Vice President, RMS Specialist at FactSet, you can get a grip on the performance of your analysts in six simple steps. Prabhakar says all it really takes to set up an analyst performance measurement (APM) system is integrating a comprehensive research management system with a portfolio analytics platform. Moreover, establishing a data-driven APM allows decision makers to get a real grip on the behavior and results of all of their analysts.

Create a framework

Setting up an SPM framework requires you to consider questions such as what is your recommendation scheme; is it uniform across analysts, sectors and regions? How is an analyst’s universe of potential investments determined? What are appropriate benchmarks for each analyst?

Get the technology tools you need

You will need certain tech tools to create a useful APM. First you’ll need a research management system where your analysts can store, retrieve and share their research, notes, ideas and recommendations. A well-designed RMS platform will increase cross-firm collaboration and help maintain continuity even when senior analysts leave.

You also need a powerful, flexible analytics engine to review your analyst performance measurement data and identify key insights. Potential analytics could include the absolute and relative performance of your analysts’ decisions, which analysts produced the best returns, and how frequently your portfolio managers took analyst recommendations.

Get analyst buy-in to analyst performance measurement system

It is essential that your analysts consistently use the RMS platform. By the same token, it’s critical that you provide a detailed explanation of how the data will be used. They will only buy in to the program if they understand the idea is to give analysts credit for their work and make sure compensation matches up with individual performance.

Develop meaningful metrics

Metrics should be quantifiable, and must directly impact your firm’s performance. Questions to consider include: Which analysts had the best absolute returns? Which analysts had the best returns relative to their benchmark? How frequently did strong buys and buys outperform sells? How often and by what deviation were internal ratings consistent with broker forecasts? How do analyst rating changes compare to price fluctuations; that is, do rating changes lead or lag price changes?

Create and automate APM reports

Analyst Performance Measurement

Combine information so that all key data points such as holdings, returns and predicted risk analysis are simple to monitor. It’s a snap today to design summary reports exactly to your firm’s specifications (including your brand’s logo, colors, and disclaimers). It’s also easy to produce reports with summary information for multiple analysts so that key data points can be quickly scanned and reviewed by senior management.

Getting the most out of your APM data

Prabhakar says make sure to take full advantage of the valuable data your APM produces. For example, you can:

  • Provide accurate and comprehensive performance evaluations. Quantitative information from the APM can be used to supplement traditional qualitative information. With an APM in place, you can ensure that you’re appropriately compensating your top-performers.
  • Look for analysts who consistently outperform the rest. Work to understand why they are successful, and apply what you learn to the rest of your team.
  • Use your APM data creatively to identify whether there are sectors or industries that aren’t being as thoroughly researched, or for an over-focus in any one area.
  • Improve communication between analysts and portfolio managers. Find out what’s going on if you have an analyst that’s making consistently good recommendations that your portfolio manager isn’t taking.
  • An APM can also be a recruiting tool. When interviewing candidates, make sure to emphasize the fact that their performance will be evaluated on an individual basis. This can be a compelling decision point for a go-getter analyst confident in their own abilities that wants recognition for their contributions.

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