The Chartered Financial Analyst (CFA) designation is regarded by most to be the key certification for investment professionals, especially in the areas of research and portfolio management. It is, however, just one of many designations used today. This can cause some confusion as investors and professionals alike puzzle out what each designation means and which is best. This article will take an in-depth look at the CFA designation. If you are a professional considering the CFA, we provide the information you need to begin weighing the costs and benefits of this decision.
What Is the CFA Designation?
The CFA designation is given to investment professionals who have successfully completed the requirements set by the globally recognized CFA Institute (formerly the Association for Investment Management and Research, or AIMR). To be eligible for the CFA designation, candidates must meet the following criteria:
1. Pass three rigorous, six-hour exams over several years.
2. Have 48 months of "acceptable professional work experience." Although the CFA institute allows a fairly broad interpretation here, the experience usually has to be financial in nature.
3. Join the CFA Institute by committing to the CFA Institute's Code of Ethics and Standards of Professional Conduct.
What Is the CFA Institute?
The CFA Institute is a global non-profit professional organization of more than 100,000 charterholders, portfolio managers and other financial professionals in 135 countries. Its stated mission is to promote and develop a high level of educational, ethical and professional standards in the investment industry.
The CFA Exams
Most people considering the CFA designation tend to worry about one thing – the exams. The exams are divided into three levels. Level 1 is written twice per year in June and December. It tests the candidates' knowledge of investment theory, ethics, financial accounting and portfolio management. (For a complete list of all sections, check out the Investopedia CFA Level 1 Study Guide.)
Level 2 and Level 3 exams are held once per year in June. For a complete breakdown of the sections, check out CFA Level II Exam and CFA Level III Exam. This is not an easy test. The CFA institute estimates that at least 250 hours of studying is needed to pass each exam. For professionals attempting to study while still working in their field, this can be a daunting number. However, many candidates consider the concentrated study required a better education than graduate school because of its total focus on investment management and practice.
CFA Pass Rates
This course of study was formed in 1962 and is constantly updated to ensure that the curriculum meets the demands of the global investment industry. This graduate-level curriculum generally entails six months of study prior to each exam date. Pass rates vary from year to year, but since the first exam was given in 1963, the overall rate is 44% and the 10-year average pass rate sits at 39% as of 2010. Moreover, fewer than 20% of the candidates pass all three tests in the first three attempts, so it is important for candidates not to get discouraged. (We've got you covered! Check out Pass Your CFA Exams On The First Try.)
CFA charterholders often seek careers at institutional investment firms (such as hedge funds or mutual funds), broker-dealers, insurance companies, pension funds, banks and universities. Some go on to work for governments in the areas of regulation and public policy. By the time the designation is earned, the charterholder will have the generally acquired four years of work experience, which also helps prepare them for a higher level financial profession. (For more on this check out: A Look At CFA Job Opportunities.)
What Do CFA Designations Mean to Investors?
When an investor is dealing with a CFA charterholder, they can make some basic assumptions. In general, a CFA is committed to becoming better at their craft, whether it is security analysis, portfolio management, business reporting or some other service. In addition, the individual has agreed to maintain a higher level of integrity by following CFA Institute's Code of Ethics and Standards of Professional Conduct.
In other words, investment professionals with a CFA designation have put in a significant amount of time and effort to better their skills and knowledge on behalf of their clients. This will come as a great comfort to most investors – especially if they are depending primarily on professional advice in managing their financial affairs.
Limitations of the CFA
Although there is a certain mastery required by the CFA exams when it comes to financial concepts and markets, having the CFA designation does not automatically make one a better stock picker or more successful investor. Stock picking is a practical skill that must be developed through experience. While the knowledge gained through studying for the CFA exam won't hurt, the certification alone isn't going to make a market maven out of every charterholder.
That said, there are some very well-known investment professionals who hold the CFA charter: Abby Joseph Cohen, Gary Brinson and Sir John Marks Templeton, among others. The reasons why these famous names pursued the CFA designation may vary, but it is safe to say they all have one thing in common: the desire to be the best.
The CFA designation does distinguish the charterholder from other practitioners in the eyes of professionals and investors. The successful CFA charterholder has proved his or her ability to withstand rigorous testing, shown a capacity for learning and made a serious commitment to conduct his or her professional life according to high ethical standards. It's not magic, but it may be the next best thing.