1. Financial Analyst Versus FRM®: Key Similarities and Differences
by Vinay K. Jessani, MBA, FRM®
In the investment world, less than 10% of financial analysts have earned the FRM® (Financial Risk
Manager) designation, a professional certification offered by the Global Association of Risk Professionals
(GARP). A frequently asked question what is the difference between financial analysts and FRM®s both
in training and in practice.
Financial analysts examine macroeconomic and microeconomic conditions including investment
fundamentals to provide guidance with investment decisions. In many cases they recommend a course of
action, such as to buy or sell an investment vehicle based upon their model for financial valuation and
potential growth. Financial analysts are often divided into two categories: buy-side and sell-side. Buy-
side analysts develop investment strategies for companies with investable capital. These companies
include mutual funds, hedge funds, insurance companies, independent money managers and nonprofit
organizations with endowments, such as some universities and collectively are referred to as institutional
investors. Sell-side analysts facilitate the work of financial services sales agents who sell stocks, bonds,
and other investments. Financial analysts typically have at least a bachelor’s degree, but a master’s
degree (usually an MBA) adds credibility and is often a prerequisite for advancement.
FRM®s and financial analysts and share a common finance foundation but the FRM® adds concepts
centered on risk assessment. The FRM® additional course work incorporates financial risk and
regulation to better understand and measure risk levels and also to learn tools to better manage financial
risk as well as enterprise, credit or market risk. FRM®s specialize in limiting unintended risks whether at
investment level, firm level or a client level. FRM® certification requires passing a test with passing rates
comparable to the Chartered Financial Analyst (CFA) examination process and continued education
credit to maintain current and best practice with respect to comprehensive risk tools.
Undertaking some type of risk is necessary if an investor wants earn returns greater than the risk free
rate and both a traditional financial analyst and FRM® will utilize this concept as a foundation. However
financial analysts are risk-neutral while FRM®s are trained to be risk averse; this is seen in both returns
and volatility levels. As such financial analysts view the positive utility from an upside move to equal the
negative utility from the equivalent of downside change; however an FRM® will see that negative returns
can be much more damaging than the utility of equivalent positive return. In order words losing a million
dollars is significantly worse than the benefit of making a million dollars. Related to this is how an FRM®
seeks to construct portfolio returns with lesser volatility. They fashion portfolios in a similar fashion as
someone who takes medication for depression; it truncates both their internal highs and lows. Financial
analysts are also concerned about volatility and will seek a lower volatility portfolio over a larger portfolio
all things being equal but will take a larger volatility portfolio if the expected returns are high enough.
Another key distinction between a financial analyst and a FRM® can be seen in the broad utilization
of derivative products. A financial analyst is generally more likely to see options and futures as way to
increase exposure to underlying security with greater leverage, whereas as a FRM® is more likely to use
these instruments to create a partial hedging transaction, to limit downside exposure but at the same time
allow for some upside potential.
FRM try to utilize many insurance policies (some financial and some procedural) to minimize
unintended risks, while still providing the risk taking in those elements that investor intends to take. A
tangible example of this might be that FRM® who buys the corporate bond on a company that they
believes has stronger credit fundamentals than the market has priced the instrument, will invariably hedge
against changes associated with a rise in interest rates. They will concentrate their investment to that of
the corporation as compared to the market in general. Related to this is how an FRM® will utilize statistics
and historical data to analyze worst case scenarios as compared to a financial analyst, who will use
expected value as a predictive tool. The FRM® uses Value at Risk (VaR) to address the results at 5%

2. percentile of results as a likely predictor of downside risk. VaR allows for greater tempering of
expectations.
The goal of n FRM is generally much more centered on preservation of capital then it is on overall
anticipated return. For an investor who is comfortable taking large risk, an FRM® might have too
conservative an approach. An investor concerned with minimizing unpleasant surprises would prefer the
FRM®'s approach.
I welcome questions on the topic of credentialing for financial analysts and FRM®s. Additionally, you
can visit the website of the Global Association of Risk Professionals at www.garp.org for more information
on the FRM® designation.