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Mount Everest of Finance

Posted on June 14, 2016

“It really is the gold standard for competency and integrity...” – Lisa Palxco, Head of CFA Program

2016-06-14_Everest.jpgEarlier this month more than 170,000 people in 91 countries worldwide sat for one of the three levels of the CFA exam. For those unfamiliar with the CFA program, the acronym stands for Chartered Financial Analyst and the designation is considered “the gold standard for competency and integrity” within the global finance community. Achieving the designation is not a walk in the park as it is a grueling, self-taught exam requiring an average of over 1,000 hours of study in order to pass three exams which are administered annually in June (the level 1 exam is also administered in December). Many have coined the phrase The Mount Everest of Finance to describe the effort and dedication it takes to earn the designation. As a firm with both principals holding the CFA designation we are often asked about the credential, so in today’s post we will take a more in depth look at the designation and what, if anything, it means for our clients.

As a means of background on the charter, we will start off with a brief video set to a 1920’s big band soundtrack to give a basic overview of the CFA designation.

 As previously mentioned, it is fairly difficult to pass all three exams in order to earn the CFA designation. According to some sources, the CFA exam ranks as the third hardest test worldwide behind only the Master Sommelier Diploma Exam and the All Souls Prize Fellowship Exam at Oxford University. More than half of people who take the exam every year fail. Pass rates in June of last year ranged from 42% - 53% depending on the level, and according to various sources less than 20% off all applicants complete all three levels to earn the CFA designation. Throughout the history of the program, which has been administered for over half a century now, there are only around 120,000 people worldwide who can claim the CFA designation. Specifically in our industry, one fellow CFA advisor estimated that less than 2% of financial advisors in the US hold the CFA designation.

The main reason the CFA exam is so difficult is the amount of information applicants must comprehend in order to pass each level. Notice that I used the word “comprehend” rather than “memorize.” The body of knowledge at each level is so overwhelming that it is simply impossible to cram or memorize all the information for the test. Everyone’s CFA journey is different, but for me, studying for a June exam started in January with a strict schedule to ensure I would be able to cover all the material in time to do at least a month’s worth of practice exams and review before the June test. I also remember Memorial Day being torture as I sat inside studying while everyone I knew was outside enjoying the long weekend. In an interview with Business Insider, fellow CFA charterholder and Bloomberg host Tom Keene described his personal experience:

Around March 15, total panic sets in. You study 24 hours a day from March 15 to May 1st.

"And then your brain goes dead," Keene said. "You try to keep studying but you can't retain anything ... Your brain is just dead."

But at least you're not nervous. Keene said that test-takers are so certain they'll flunk on test day that there's no room for nerves. Study aside, that feeling alone gives test-takers a sense of humility — it's a rite of passage.

So now that we have adequately established that the tests are hard, what does all this mean for our clients or other clients of advisors with the CFA designation? Well, let us start by telling you what it doesn’t mean. It doesn’t guarantee that investment performance of a portfolio managed by a CFA charterholder will be superior to that of one managed by a non-charterholder. As we’ve explained in previous Insights, returns are very difficult if not impossible to manufacture or predict. The real value-add of a professional portfolio manager is their ability to manage risk. In order to properly manage risk, an investment manager must understand the different types of idiosyncratic, macro, and inter-dependent risks for each investment inside of and for the portfolio as a whole. Clients of an advisor with the CFA charter can rest assured that their manager has a fairly comprehensive understanding of these risks.

The other large differentiator for the CFA charterholder is their standard of ethics. As the opening video pointed out:

The testing requirements for the CFA designation go beyond most MBA programs, while the ethical standards of the organization are well in excess of the legal requirements for the industry.

We recently wrote about the new legislation being passed that will require all advisors managing ERISA assets to be held to a fiduciary standard. Being a fiduciary simply means that you are acting in your clients’ best interests, and the fact that everyone who calls themselves a financial advisor isn’t already held to this standard is an absolute joke. Suffice it to say, the CFA Code of Ethics & Standards of Professional Conduct go well beyond even the fiduciary standard. In our business, trust is the most important aspect of our job. If your actions causes others to question your integrity and subsequently lose their trust, you are as good as done in this business. The ethical standards required of all CFA charterholders should give clients an added level of comfort and trust in their advisor.

Hopefully after reading today’s posts everyone has a new appreciation for and understanding of what it means to be a CFA charterholder. Even though having the CFA designation doesn’t give us a crystal ball to predict financial markets, we are obviously very proud to be a part of such an elite group of investment professionals with very high standards for ethics and integrity. We’ll wrap up today’s post with a quote from an Investopedia article about the CFA designation.

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.


elliott_headshot_bw.jpgAuthor Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.


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