Claritas Curriculum Review: A Top-Down View of the Investment Industry

Looking over the curriculum for the Claritas Investment Certificate recently, I was surprised at the level of difficulty and detail. As a charterholder, I can tell you that gone are the doubts that the certificate is just a watered-down version of the CFA curriculum with too little detail to be a worthwhile credential.
To help Claritas candidates work through the volumes of information, especially in the more technical areas, we will be working through each chapter in the curriculum through a series of posts.
Much like the study guide for the CFA designation, the FinQuiz Claritas Notes are not meant as a substitute for studying the official curriculum. Instead, candidates should use them as a complement to the curriculum and as a resource for a condensed review of the material. We won’t be able to cover every topic within the blog posts or the amount of detail you’ll need to pass the test, but we’ll try to cover the most important concepts in a way that explains the material and helps you remember it.
The curriculum starts with an intro into types of assets and financial markets. An important distinction is made between real and financial assets. Real, or physical, assets are just as the name implies and a direct ownership of a tangible resource. Financial assets represent a claim, or indirect ownership, on a real asset and are most commonly a debt or equity ownership.
I thought the material on savers and spenders was a little obvious but necessary to a later idea of how the industry helps the economy. Really it all boils down to capital, or real assets, and how that capital moves around our system. Those with assets (capital) that they are not using lend it to those who need it for some kind of production. It would be impossible to do this on a national scale without the financial markets, which help savers and spenders make the exchange.
Of course, it would take more hours that in the day for every saver and spender to arrange their exchange every time necessary. That’s why we have financial intermediaries, companies that act as the middle-man to the exchange, which include banks, insurance carriers, investment banks and investment companies.
Understand the difference between the money market, short-term debt issued for a year or less, and the capital markets which facilitate a longer-term trade in equity (stocks) and debt (bonds).
How the Industry Benefits the Economy
The way the industry, or the financial intermediaries listed above, helps with this exchange between savers and spenders is the key behind how the economy benefits from the investment industry.
The idea is that savers want the highest return for lending their assets. Financial intermediaries help to find the companies that are able to offer the highest returns because they can use the assets for the highest profit. This means that savers’ resources go to the most productive goods and services possible and the economy benefits from greater efficiency.
The rest of the section is spent on describing capitalism and planned economies and the differences between the two systems. Understand the key differences between the two: private ownership versus state ownership, profit motive versus social motive to business, and the market-lead exchange of capital versus government-controlled exchange.
How the Investment Industry Benefits Individuals
The investment industry is really a smaller piece of the whole pie that is the financial services industry. The investment industry helps individuals in finding that highest return for their assets by matching them up with companies that can use those resources.
Liquidity refers to an investor’s ability to buy or sell an asset quickly and that market forces set a reasonable spread in prices. For example, most stocks are considered liquid because there are enough buyers and sellers to ensure a quick sell without having to make a large price concession. Direct ownership in real estate is less liquid because there are not as many available buyers or sellers at one specific time. A seller might still be able to make a quick transaction, but they might have to move their price up or down greatly until they find a willing buyer.
Understand the list of characteristics of a well-functioning investment industry:
1) Availability of a range of products and services
2) Competitive markets
3) Liquid markets and low transaction costs
4) Access to reliable financial information
5) Facilitates the transfer of risk
6) Trust
7) Competent professionals
Understand the difference between a broker and a dealer in the market. A broker represents the best interest of the investor client while the dealer helps to facilitate exchanges between brokers and companies and makes a profit from the intermediation.
The difference between institutional investors and other investors is an important one as well. Institutional investors are organizations with the role of managing the money for another organization like a bank, insurance company or pension fund.
Fiduciary and the fiduciary standard is an important concept to the industry. As employees of the industry, we represent investors’ best interests and have a fiduciary (agency) responsibility to act for their benefit.
Key Forces Driving the Investment Industry
Understand the four key forces driving the industry:
1)    Competition depends on innovation, pricing and service of products
2)    Computerization reduces operating and trading costs and can drive development of new products
3)    Globalization further helps to facilitate the exchange of assets but on a larger scale
4)    Regulation helps to protect investors by promoting disclosure and transperancy
Subsequent posts will probably not be as long as this one but there is some really fundamental information in this first chapter that you need to understand the bigger picture. A sample of the Finquiz Claritas Notes is available by clicking here. We’ll continue in our next post with Ethics and the Investment Profession.
‘til next time, happy studyin’
Joseph Hogue, CFA

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