What is a CFA? Going for the Chartered Financial Analyst charter is the Mount Everest for financial professionals. The three CFA exams are tough with low pass rates. But there are payoffs in addition to the satisfaction of attaining the CFA Charter – it has the greatest monetary value of any financial degree or designation.
What is a CFA?
Originally the Association for Investment Management and Research (AIMR), the CFA Institute awards CFA charters globally. Candidates take part in the CFA Program, writing a series of three exams comprising CFA Level I, Level II and Level III. These are self-study exams that test a wide range of financial knowledge. The Level I exam can be written in December or June. The Level II and Level III exams are written in June only.
Level I of the CFA Program covers a broad range of material including ethics, economics, accounting, corporate finance and investment analysis. Level II covers financial and security analysis in more depth and Level III concentrates on portfolio management.
Level I and Level II are multiple-choice exams. Level III includes a written section.
The pass rates are very low for the CFA Program. The Level I pass rate is traditionally in the low 40% but has trended down. The Level II pass rate is in the low 30% range. The Level III has the highest pass rate in the low 50% range.
The exams are set by the CFA Institute and written only in English at locations worldwide. There are several private “preparation” companies that have educational materials available for sale and run study seminars. Local CFA chapters also run preparation courses for local candidates. Universities have recently begun to offer Master of Finance courses that incorporate CFA material. Students registered in these programs must complete their university studies and then also complete the CFA exams independently.
CFA Gold Standard
The CFA Charter has become the global “working papers” for both investment research and portfolio management. It is required for registration as a portfolio manager in many jurisdictions.
Is it worth it? Well, the average CFA candidate has a Bachelor or Masters degree in Business or Finance and spends an average study time of 200 to 400 hours on each level. Several surveys have shown that the CFA designation has the greatest monetary value of any degree or designation.
Dimensions of the CFA Institute:
- Number of members: 122,664
- Countries with members: 142
- Number of societies: 140
- Countries with societies: 62
- Number of CFA Charter Holders: 114,636
Source: CFA Institute
CFA Level I:
The CFA Level I creates a base of knowledge necessary for continuing on in the CFA Program. CFA I is sometimes described as a mile wide, but only a few feet deep. Candidates would have already encountered many of the topics covered by CFA I over the course of most business and finance university programs.
The CFA I exam broadly tests CFA candidates across the spectrum of finance, economics and business ethics. It is the breadth of the exam that makes it difficult. However, each topic of the CFA exam would have been treated as a separate course in university. The CFA I exam is like writing a multiple choice test on all of your university courses on the same day, at a medium difficulty level in terms of depth and detail. The exam sets up better for those candidates who have a background in finance or economics but with committed time, effort and energy, most people can sufficiently learn the material.
CFA Level II:
Similar to Levels I and III, the CFA Level II exam is broken up into a three hour morning session followed by a three hour afternoon session. The Level II exam emphasizes analysis along with application and each three-hour session is composed of 10 mini-cases, or “vignettes”. Each vignette is one to three pages in length, followed by six multiple-choice questions. Candidates must decipher the relevant information within the case to answer each question by interpreting charts, tables and graphs of data.
The CFA Level II curriculum delves further into financial analysis by expanding on the investment tools that candidates developed in Level I. Many new concepts are presented that are normally covered in specialized courses in upper years of undergraduate business programs. The Level II exam has a strong focus on Financial Reporting and Equity Investments, which may represent up to 55% of the test, while there is a growing focus on Alternative Investments and Derivatives. Ethics and Professional Standards, always an important subject, accounts for 10% of the exam.
The CFA Level II exam experienced an average pass rate of 43% from 2004-2013 and 300+ hours of self-study time is recommended.
The CFA Level III:
While CFA I and CFA II emphasize analytical tools, CFA III focuses on synthesizing concepts and analytical methods into portfolio management and private wealth planning. It places a secondary focus on strategies for applying the tools, inputs, and asset valuation models for managing equity, fixed income, derivative and alternative investments. Ethical and professional standards remain an important topic.
The CFA III exam notoriously differentiates itself from the previous exams by having an essay portion in the morning and a multiple-choice portion (identical to CFA II) in the afternoon. A common misconception is that candidates are expected to formulate their answers using structured and well written essays. On the contrary, given time constraints, bullet points and incomplete sentences are acceptable as long as the meaning is clear and in direct response to the question.
Another CFA urban myth is that most candidates fail the morning session and redeem themselves in the afternoon. Given result confidentiality, it is unlikely that this will ever be substantiated or refuted. However, given our own experiences and those of other CFA candidates we have talked with, we tend to agree with this perception.
Level III has historically had the highest pass rate of all three exams and it is often referred to as the easiest of the three levels. Don’t let this fool you! Successful candidates are encouraged to dedicate the same number of hours to prepare for Level III as they did for previous exams. Level III is no time to slack off. Candidates should tackle the exam with the same regimented approach as they did for the previous two levels.
The CFA Work Experience Qualification
The CFA exams can be written without prior financial analysis experience. To be awarded a CFA Charter, in addition to successfully completing the three exams, candidates must have four years of experience, of which at least 50% of their time was spent directly involved with making or supporting investment decisions. Work must be full time and can be earned before, during, or after the candidate has passed the CFA Program. References are required from colleagues and supervisors, with at least one being from a CFA Charter holder. Only upon successful review by the CFA Institute will a candidate be awarded his or her full CFA Charter.