One of the underlying tenets of finance is the ever-true trade-off between risk and reward. For those looking to increase their potential rewards from an investment, the risks associated with the investment will increase, often at a greater rate. In the years leading up to the subprime mortgage meltdown of 2007-2008, investors, lenders and bankers all seemingly believed that the risks associated with investments at that time had been far outweighed by the potential rewards that could be earned.
As we all know now, the risks were actually far greater than anyone could have imagined. To that point, risk management has become a more important role in the world of finance and the capital markets than it ever has been before. With many firms focusing their attentions on developing more and stronger risk measures and teams, the field of risk management is becoming a more desirable, and consequently more competitive, field than ever before. More and more risk professionals are choosing to further their credentials by enrolling in the Financial Risk Manager (FRM) designation.
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The FRM designation is a professional certification offered by the Global Association of Risk Professionals (GARP). The designation is viewed as the globally recognized gold standard for risk professionals. Since its inception in 1997, the FRM designation has rapidly grown in popularity, with enrollment in the program increasing year after year, and exploding in the years following the global financial crisis of 2008.
The improper handling of potential market and credit risks in the early part of the 21st century led to a huge demand for qualified risk professionals who were able to define a firm's risks clearly and accurately. Professionals holding the FRM designation are often viewed as some of the most qualified in the industry, which led to the enrollment boom.
In order to obtain the FRM designation, candidates are required to meet two key requirements: Successfully pass two separate FRM exams, and complete a minimum of two years of full-time work experience in the field of financial risk, or related areas. The work experience can be related to fields like portfolio management, industry research, trading, faculty academic and risk consulting. Since the FRM designation relates primarily to the field of finance, only finance-related vocations are considered as acceptable work experience.
The curriculum requirement is generally the prerequisite that is of interest to potential candidates. Consisting of two thorough four-hour examinations, satisfying the FRM curriculum requirement is no easy task. While prior to 2009, the exams were offered as part of a two-part, same-day examination, in November of 2009, GARP made the change to offering one exam at a time, twice a year (May and November). Candidates do still have the option of sitting for both exams on the same day, however if Part I is not passed successfully in the morning, the afternoon's Part II will not be graded.
Consisting of 100 multiple-choice questions, Part I consists of four key topics: Foundations of Risk Management (20%), Quantitative Analysis (20%), Financial Markets and Products (30%), and Valuation and Risk Models (30%). While most would think that the first of the two exams would be more entry level and "easier," this is not so. Since the two exams were split in 2009, the pass rate for Part I has consistently been lower than Part II, suggesting that the material covered in Exam I is a difficult venture for most test-takers. In particular, the Quantitative Analysis and Risk Modeling sections are considered the most challenging.
While Part II only asks test takers to answer 80 multiple-choice questions, it covers five distinct topic areas: Market Risk Measurement & Management (25%), Credit Risk Measurement and Management (25%), Operational and Integrated Risk Management (25%), Risk Management and Investment Management (15%) and Current Issues In Financial Markets (10%). As is true for Part I of the exam, the questions posed to candidates are designed to incorporate a holistic assessment of the curriculum. By incorporating multiple topics in exam questions, the FRM exam is a thorough test of candidates' understanding of the material.
The payoff for candidates who successfully complete both the exam and work experience requirements comes in the career opportunities available to FRM designation holders. The designation clearly identifies FRM holders as some of the most qualified in their industry. Having displayed the commitment and perseverance to complete the program, certificate-holders are able separate themselves from other risk professionals who lack the designation. In addition to the curriculum and experience requirements, certified FRMs are expected to follow strict principles, which promote ethical conduct and behavior.
All these factors have led to certified FRMs being employed in the most prestigious major banking institutions, asset managers, accounting firms and government agencies in the world. With demand for qualified risk professionals expected to continue to grow in the future, FRMs will be in even greater demand in the industry.
The Bottom Line
As mentioned above, becoming a certified FRM is not a venture that comes easily, but rarely are worthwhile undertakings achieved with little effort. For risk professionals and those interested in working in the field of risk management, the FRM designation should be given consideration for those looking to expand both their career potential and knowledge of the industry.