Chartered Financial Analyst Explained

The Chartered Financial Analyst (CFA) program is a postgraduate professional certification offered internationally by the US-based CFA Institute (formerly the Association for Investment Management and Research, or AIMR) to investment and financial professionals. The program teaches a wide range of subjects relating to advanced investment analysis—including business analysis, statistics, probability theory, fixed income, derivatives, economics, financial analysis, corporate finance, alternative investments, portfolio management—and provides a generalist knowledge of other areas of finance.

A candidate who successfully completes the program and meets other professional requirements is awarded the "CFA charter" and becomes a "CFA charter-holder". As of November 2022, at least 190,000 people are charter-holders globally, growing 6% annually since 2012 (including effects of the pandemic).[1] Successful candidates take an average of four years to earn their CFA charter.[2] [3]

The top employers of CFA charter-holders globally include JPMorgan Chase, UBS, Royal Bank of Canada, and Bank of America.[4]

History

Sectors with the highest proportion of CFA Charter-holders [5] !Sector!%
Portfolio Management25%
Research12%
Consulting10%
Chief level executive9%
Investment strategy7%
Risk management7%
Wealth management5%
Credit analysis5%
Trading4%
Accounting / audit4%
Financial planning3%
Others9%

The predecessor of the CFA Institute, the Financial Analysts Federation (FAF), was established in 1947 as a service organization for investment professionals. The FAF founded the Institute of Chartered Financial Analysts in 1962; the earliest CFA charter-holders were "grandfathered" in through work experience only, but then a series of three examinations was established along with a requirement to be a practitioner for several years before taking the exams. In 1990, in the hopes of boosting the credential's public profile, the CFA Institute (formerly the Association for Investment Management and Research) merged with the FAF and the Institute of Chartered Financial Analysts.

The CFA exam was first administered in 1963 and began in the United States and Canada, but has become global with many people becoming charter-holders across Europe, Asia, and Australia. By 2003, fewer than half the candidates in the CFA program were based in the United States and Canada, with most of the other candidates based in Asia or Europe. The number of charter-holders in India and China had increased by 25% and 53%, respectively, from 2005 to 2006.[6]

CFA Charter

The CFA designation is designed to demonstrate a strong foundation in advanced investment analysis and portfolio management, accompanied by a strict emphasis on ethical practice.

A charter holder is held to the highest ethical standards. Once an investment professional obtains the charter, this individual also makes an annual commitment to uphold and abide by a strict professional code of conduct and ethical standards. Violations of the CFA code of ethics may result in industry-related sanctions, suspension of the right to use the CFA designation, or a revocation of membership.

Requirements

To become a CFA charter-holder, candidates must satisfy the following requirements:[7]

Due to the timing of the exams, completing all three levels of the CFA is possible within two years,[10] but candidates must still complete the work experience requirement of 4,000 hours over a minimum of three years to become a charter-holder.

Pass rates

The CFA exams are noted to be notoriously difficult, with low pass rates. During the period 2010–2021, pass rates for Levels 1-3 ranged from 22-56%.[11] The CFA Level 1 examination in May 2021 and July 2021 made news headlines after plummeting to a record-low pass rate of 25% and 22%, respectively,[12] [13] [14] and in August 2021, the level 2 pass rate fell to 29%.[15]

Curriculum

The curriculum for the CFA program is based on a Candidate Body of Knowledge established by the CFA Institute.[16] The CFA curriculum is updated annually to reflect the latest best practices, with the extent of changes varying by year and level.[17] The curriculum comprises, broadly, the topic areas below. There are three exams ("levels") that test the academic portion of the CFA program. All three levels emphasize the subject of ethics. The material differences among the exams are:

For exams from 2008 onward, candidates are automatically provided the curriculum readings from the CFA Institute at the time of registration for the exam. The curriculum is not provided separately in the absence of exam registration. If the student fails an exam and is allowed to retest in the same year, the CFA Institute offers a slight rebate and will not send the curriculum again (the curriculum changes only on an annual basis). If the student retests in a year other than the year of failure, he or she will receive the curriculum again, as it may have been changed. Study materials for the CFA exams are available from numerous commercial learning providers, although they are not officially endorsed. Various organizations (some officially accredited) also provide course-based preparation.[18] As of 2019, the examination includes questions on artificial intelligence, automated investment services, and mining unconventional sources of data.[19]

Ethical and professional standards

The ethics section is primarily concerned with compliance and reporting rules when managing an investor's money or when issuing research reports. Some rules pertain more generally to professional behavior (such as prohibitions against plagiarism); others specifically relate to the proper use of the designation for charter-holders and candidates. These rules are delineated in the "Standards of Professional Conduct", within the context of an overarching "Code of Ethics".

Quantitative methods

This topic area is dominated by statistics: the topics are fairly broad, covering probability theory, hypothesis testing, (multi-variate) regression, and time-series analysis. Other topics include time value of money—incorporating basic valuation and yield and return calculations—portfolio-related calculations, and technical analysis.[20] Recent additions, as mentioned above, are a survey of machine learning and big data.[21]

Economics

Both microeconomics and macroeconomics are covered, including international economics (mainly related to currency conversions and how they are affected by international interest rates and inflation). By Level III, the focus is on applying economic analysis to portfolio management and asset allocation.

Financial statement analysis

The curriculum includes financial reporting topics (International′ and U.S. Generally Accepted Accounting Principles), and ratio and financial statement analysis. Financial reporting and analysis of accounting information is heavily tested at Levels I and II, but is not a significant part of Level III.[22]

Corporate finance

The curriculum initially covers the major corporate finance topics: capital investment decisions, capital structure policy and implementation, and dividend policy; this builds on the accounting, economics, and statistics areas. It then extends to more advanced topics such as the analysis of mergers and acquisitions, corporate governance, and business and financial risk.[23]

Security analysis

The curriculum includes coverage of global markets as well as analysis and valuation of the various asset types: equity (stocks), fixed income (bonds), derivatives (futures, forwards, options, and swaps), and alternative investments (real estate, private equity, hedge funds, and commodities). The Level I exam requires familiarity with these instruments. Level II focuses on valuation, employing the "tools" studied under quantitative methods, financial statement analysis, corporate finance, and economics. Level III centers on incorporating these instruments into portfolios.

Equity and fixed income

The curriculum for equity investments includes the functioning of the stock market, indices, stock valuation, and industry analysis.Fixed income topics similarly include the various debt securities, the risk associated with these, and valuations and yield spreads.

Derivatives

The curriculum includes coverage of the fundamental framework of derivatives markets, derivatives valuations, and hedging and trading strategies involving derivatives, including futures, forwards, swaps, and options. The curriculum incorporates various pricing models and frameworks, such as Black-Scholes and binomial option pricing (extending to coverage of interest rate trees), while coverage of the underlying mathematics is conceptual as opposed to technical.

Alternative investments

The curriculum includes coverage of a range of topics in the alternative investment category. Topics include hedge funds, private equity, real estate, natural resources (particularly precious metals), infrastructure, and other alternative investments, including, as applicable, strategies, sub-categories, potential benefits and risks, fee structures, and due diligence.

Portfolio management and wealth planning

This section increases in importance with each of the three levels—it integrates and draws from the other topics, including ethics.It includes:(i) modern portfolio theory (efficient frontier, capital asset pricing model, etc.);(ii) investment practice (defining the investment policy for individual and institutional investors, resultant asset allocation, order execution, and hedging using derivatives);and (iii) measurement of investment performance.

Efficacy of the CFA program

Given the time and effort that candidates must undergo to complete the CFA program, it would be expected that CFA charter-holders have higher performance than those who do not complete the program. However, there is some evidence that differential analyst performance is economically inconsequential,[24] suggesting the predominance of signaling; although other research in the Financial Analysts Journal (a journal published by CFA Institute) suggests a positive human capital impact from the CFA program.[25]

Global regulatory and legal recognition

Legal recognition by country

Source:[26]

Australia

Bahrain

Brazil

Canada

Egypt

Germany

Greece

Hong Kong, China

Indonesia

Ireland

Israel

Malaysia

Mexico

Netherlands

Peru

Philippines

Portugal

Saudi Arabia

Singapore

South Africa

Spain

Sri Lanka

Taiwan

Thailand

Turkey

United Kingdom

United States

Vietnam

Recognition by professional organizations

CBV Institute

Individuals who have passed all three levels of the CFA exams are eligible to skip the elective courses of the CBV Institute Program of Studies.[58]

The Society of Actuaries (SOA)

The Society of Actuaries (SOA) granted the credit of "Validation by Educational Experience (VEE)-Economics" to the candidates who passed the CFA Level I exam. SOA also granted both the credits of VEE-Corporate Finance and VEE-Applied Statistical Methods to the candidates who passed the CFA Level II exam. [59]

Professional Risk Managers' International Association (PRMIA)

CFA charter-holders are exempted by the Professional Risk Managers' International Association (PRMIA) from the first required exam for the PRM qualification.[60]

Certified Financial Planner Board of Standards (CFP Board)

The Certified Financial Planner Board of Standards (CFP Board) has approved the CFA charter as fulfilling most of the education coursework requirement for CFP certification, pending completion of a capstone course registered with CFP Board prior to sitting for the CFP exam.[61]

Trademark disputes

India

CFA Institute is not affiliated with the Chartered Financial Analyst degree offered by the Institute of Chartered Financial Analysts of India (ICFAI) University of India or its affiliate, the Council of Chartered Financial Analysts (CCFA).

In 1998, CFA Institute's predecessor organization, AIMR, sued and won a judgment in an American court against ICFAI/CCFA.[62] The judgment prohibited ICFAI/CCFA and its members from using the CFA or Chartered Financial Analyst mark in the United States and Canada. In August 2006, an Indian court issued a temporary injunction against the Indian entity, as well.

The judgments made no assessment of the quality of the Indian program and merely discussed the trademark violation. The Indian Association of Investment Professionals is the only organization in India that is affiliated with the CFA Institute. The CFA Institute's trademark rights to the "CFA" and "Chartered Financial Analyst" brands were affirmed in India by the Delhi High Court. Further, the Delhi High Court issued an interim injunction ordering ICFAI and its affiliated Council of Chartered Financial Analysts to stop using CFA Institute trademarks. The Deputy Registrar of Trade Marks determined that the trademark registration issued to CFA Institute for the "CFA" brand must be republished because of an error by the Trade Marks Registry. CFA Institute has numerous trademark applications on file with the Trade Marks Registry, and CFA charterholders from CFA Institute are free to use the "CFA" and "Chartered Financial Analyst" marks throughout India. [63]

On May 8, 2007, the U.S. District Court for the Eastern District of Virginia vacated a default judgment issued against ICFAI that CFA Institute obtained in October 1998. ICFAI had moved to reopen the case and to vacate the default judgment arguing that the court lacked jurisdiction over ICFAI at the time the default judgment was issued. With the default judgement vacated, ICFAI informed Indian CFA charter holders that they could legally use their charter in the United States and Canada. However, on September 4, 2007, the court reversed its decision to vacate after a motion to reconsider that decision was filed by CFA Institute.[64] [65]

United Kingdom

In January 2007, the UK Trade Marks Registry refused to register "Chartered Financial Analyst" as a trademark, as the word "chartered" in the United Kingdom is associated with bodies incorporated by royal charter and thus "the relevant public in the UK would, prima facie, expect a person using the mark applied for to be representing themselves as a member of an organization of the kind subject to a Royal Charter".[66] "CFA" is a registered trademark in the UK, but only for "Educational services" (class 41) rather than "Financial services" (class 36) under which the attempt to register "Chartered Financial Analyst" had been made.[67]

See also

External links

Notes and References

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  2. Web site: Become a CFA Charterholder . Cfainstitute.org . 2015-11-23.
  3. Web site: 1963 - Current Candidate Examination Results. live. https://web.archive.org/web/20140729093324/http://www.cfainstitute.org/programs/cfaprogram/Documents/1963_current_candidate_exam_results.pdf . July 29, 2014 . CFA Institute.
  4. Web site: Research & Data. www.cfainstitute.org. 2017-06-14. 2017-07-01. https://web.archive.org/web/20170701202717/https://www.cfainstitute.org/about/research/Pages/index.aspx. dead.
  5. Web site: Macon . Sophie . CFA Career Paths: What Are Typical Job Opportunities For CFA Charterholders? - 300Hours . 2021-10-06 . 300hours.com . en-US.
  6. Tatham. Charles Jr.. 1945-01-01. A Brief History of The Society. Financial Analysts Journal. 1. 1. 3–5. 10.2469/faj.v1.n1.3934. 0015-198X.
  7. Web site: Tan . Zee . What Exactly Are The CFA Charterholder Requirements? - 300Hours . 2021-04-13 . 300hours.com . en-US.
  8. Membership Requirements. 2015-11-23. Cfainstitute.org. 2013-04-24. https://web.archive.org/web/20130424102748/http://www.cfainstitute.org/about/membership/process/Pages/index.aspx. dead.
  9. Web site: CFA Work Experience Requirements: A Crystal Clear Guide - 300Hours. 2021-04-13. 300hours.com. en-US.
  10. Web site: Plan Your 2021 CFA Registration With Our Free Journey Planner - 300Hours. 2021-04-13. 300hours.com. en-US.
  11. Web site: CFA Pass Rates: How Hard Are The CFA Exams? . 3 Feb 2022 . 300Hours . en.
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  13. News: CFA exams: high fail rate sets flunkees speculating. live. Financial Times. 2 August 2021 . https://web.archive.org/web/20210802112002/https://www.ft.com/content/40f33d0a-7566-48a0-97e5-4189821375c4 . 2021-08-02 .
  14. Web site: News. Bloomberg. 2021-07-27. CFA Pass Rate Plummets to Record Low of 25% for Level 1 Exam - BNN Bloomberg. 2021-08-03. BNN.
  15. Bloomberg, CFA Level II Exam Pass Rate Is Lowest Ever at 29%
  16. Web site: Topical Outline. Cfainstitute.org. 2010-03-23. https://web.archive.org/web/20071005132946/http://cfainstitute.org/cfaprog/courseofstudy/topic.html. October 5, 2007.
  17. Web site: 2022 CFA Curriculum Changes: Our Super Summary - 300Hours. 2021-10-06. 300hours.com. en-US.
  18. Web site: CFA List of Registered Curriculums and Educational Programs. Cfainstitute.org. 2015-11-21.
  19. News: CFA exam to add artificial intelligence, 'big data' questions. 2017-05-23. Reuters. 2018-03-01.
  20. Web site: 2017 Level I CFA Program Curriculum. CFA Institute. 2017-02-03.
  21. Discussion is top down; see: Kathleen DeRose and Christophe Le Lanno (2020). "Machine Learning".
  22. Web site: CFA Level 1 FRA: Our Cheat Sheet - 300Hours. 2021-04-13. 300hours.com. en-US.
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  25. Kang. Qiang. Li. Xi. Su. Tie. 2018-04-01. Sell-Side Financial Analysts and the CFA® Program. Financial Analysts Journal. 74. 2. 70–83. 10.2469/faj.v74.n2.2. 218507866 . 0015-198X.
  26. Web site: Tan . Zee . 2022-01-14 . CFA Exam Exemptions: A Big Perk You Should Know - 300Hours . 2022-03-12 . 300hours.com . en-US.
  27. Web site: RG146 Gap Training Program for CFA Charterholders and Candidates (Personal Advice) | ASIC - Australian Securities and Investments Commission. Australian Securities & Investments Commission.
  28. Web site: FASEA approves education credits for CIMA and CFA coursework to attain a Professional Designation. August 9, 2019.
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  30. Web site: Griffith University CFA.
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  33. Web site: APIMEC. Apimec.com.br. 2015-11-21.
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  46. Web site: CMVM - Regulamento da CMVM n.º 3/2010. www.cmvm.pt.
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  52. Web site: SAIS Education Policy.
  53. Web site: Certified Advisor - CAd Program. 2021-01-20. www.cfasociety.org.
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  55. Web site: SEC Thailand fund manager requirement.
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  58. Web site: Course Exemptions . CBV Institute . CBV Institute . 21 November 2021.
  59. Web site: Validation by Educational Experience. soa.org.
  60. Web site: PRM Frequently Asked Questions. PRMIA.
  61. Web site: Education Requirements. cfp.net. 2016-07-16.
  62. Web site: AIMR Obtains Favorable Ruling in Trademark Infringement Suit. Cfainstitute.org. 2010-03-23. https://web.archive.org/web/20070426131809/http://www.cfainstitute.org/aboutus/press/release/98releases/traderule.html. April 26, 2007.
  63. Web site: FAQs. cfainstitute.org. November 23, 2015.
  64. Web site: India FAQS: The CFA Program in India . Cfainstitute.org. 2010-03-23. https://web.archive.org/web/20071007064351/http://www.cfainstitute.org/aboutus/worldwide/asiapac/indiaFAQ.html#usinjunction. October 7, 2007.
  65. Web site: MD, CFA Institute Discusses the Latest Developments on the CFA Exams in India. Daulatguru.com. 2010-03-23. dead. https://web.archive.org/web/20100408145331/http://www.daulatguru.com/blog/33-cfa-institute-director-speaks-on-cfa-exam-in-india-june-2010. 2010-04-08.
  66. Web site: Trade Mark Application No. 2226144: Chartered Financial Analyst. Patent.gov.uk. 2015-11-21. 2012-02-05. https://web.archive.org/web/20120205080643/http://www.patent.gov.uk/tm/t-decisionmaking/t-challenge/t-challenge-decision-results/o31506.pdf. dead.
  67. Web site: Case details for trade mark UK00002225116. UK Intellectual Property Office. 28 June 2016.