Wall Street’s CFA Program Is a Colossal Waste of Time
(Bloomberg Opinion) -- Twice a year, young finance workers perform a sacred ritual where they file into testing centers with Ziploc bags full of No. 2 pencils and financial calculators to take exams that will determine their future professional success. Maybe. I’m referring to the Chartered Financial Analyst (CFA) exams, which are notoriously difficult. The latest pass rate plummeted to the lowest ever, with only about 25% of test-takers passing Level I of the exams.
The CFA exams were created in 1963 as a way to establish standards of proficiency in securities analysis. If you pass all three levels and earn the CFA charter, you are assumed to know things about accounting, financial statements, derivatives and portfolio theory. No such standard existed prior to the CFA, and the securities industry lacked a professional designation like the CPA, which those in the accounting profession need to practice their craft. But the CFA is not a licensure exam. CFAs and non-CFAs alike work in investment banking, investment research and trading. There is a licensure exam in finance, and it’s called the Series 7, but it’s not too difficult.
So if the CFA is not a license to practice finance, what is it? Many take the exams to get ahead in their careers, thinking that the CFA designation might earn them a promotion or a better-paying job. In reality, the CFA is just one of many factors that an employer might take into consideration in the hiring process. I have encountered many low-level finance workers and back office employees who take the exams in the hopes that they might advance to the front office, in search of respect and a higher paycheck. Frequently, they don’t.
The biggest cost associated with the decision to become a CFA is time. The CFA doesn’t cost much in the way of actual dollars, just a few thousand for the entire course of study. But it takes up an enormous amount of time consisting of many hundreds and even thousands of hours of studying for each level. And that’s if they pass all three exams on the first try, which only about 20% of people do. For the other 80%, it’s a commitment of four or five years, and sometimes longer. I have several friends who, once they began the CFA program, seemingly disappeared, not to be seen for three years.
With pass rates dropping, it’s more critical than ever to conduct a thorough cost-benefit analysis when deciding whether to take the CFA exams. Often, the benefit is pure credentialism: you get to put the letters “CFA” after your name. And yes, there are some professions within finance that, for all intents and purposes, require a CFA. Asset management is one of them, and so is investment research, and to a lesser extent investment banking. In those cases, not getting a CFA might be a career-limiting move. Traders don’t really need CFA.
Many CFAs say the value in the designation is a product of the time and effort that went into it, and that it shows they are committed to the profession. That sounds a bit like the labor theory of value to me. I never got the impression that non-CFAs were any less committed than CFAs. I took and passed the Level 1 exam in 2002, having just graduated from an MBA program. I then took Level 2 in 2003, but I was going through a great deal of personal turmoil and failed. At that point I decided that as a trader, I didn’t need it and it wasn’t worth the effort. I don’t regret the decision.
I realized when I was studying for the exams that I wasn’t really learning the material; I was just learning how to pass a test. I honestly don’t remember a single thing I learned from the CFA program. On the other hand, I got a great deal out of my MBA program, which was an immersive experience, with in-person classes, guest lectures and study groups. My MBA is still paying dividends. The CFA Institute has, whether intentionally or not, euthanized the MBA. On Wall Street, the CFA is held in much higher regard, which is too bad because the MBA degree (or other graduate programs) produce more well-rounded and thoughtful employees.
My biggest criticism of the CFA program is that it doesn’t necessarily make you a better investor. If there were concrete evidence that funds managed by CFA charterholders outperformed those of non-CFAs, that would be a compelling reason to take the test. But there is none —it’s all theater. And none of the really interesting things that are happening in finance these days, like the study of sentiment and psychology, are covered in any detail by the CFA program.
The CFA is a colossal waste of time. Three years would be better spent on just about any other pursuit. Whether people realize it or not, finance is a profession that requires a lot of creativity. The CFA program beats it out of people. I get the impression that people are becoming un-enamored with the CFA program (and maybe the CFA Institute, which has managed to accumulate a large war chest of money and influence) and a backlash has been brewing for a while. Not only did I decline to finish the CFA program, I decided to pursue an MFA instead—a Masters in Fine Arts. It is probably a better use of my time.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Jared Dillian is the editor and publisher of The Daily Dirtnap, investment strategist at Mauldin Economics, and the author of "Street Freak" and "All the Evil of This World." He may have a stake in the areas he writes about.
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