Sunday, April 11, 2010

The CFA - A Case For Hierarchical Certification?

A chat with a friend who is (somewhat dispassionately) preparing for his Level 3 CFA examination prompted this question in my mind.

A few lines from Wikipedia on the CFA designation: Chartered Financial Analyst (CFA) is an international professional designation offered by the American CFA Institute (formerly known as AIMR) to financial analysts who complete a series of three examinations. To become a CFA Charterholder candidates must pass each of three six-hour exams, possess a bachelor's degree (or equivalent, as assessed by CFA institute) and have 48 months of work experience in an investment decision-making position. CFA charterholders are also obligated to adhere to a strict Code of Ethics and Standards governing their professional conduct

Having seen many friends prepare for the examinations (and my own half-hearted attempt) I know for sure that the course coverage and subsequent examinations are tough and rigorous. This is the oldest designation of its kind and is well-respected. (The Wikipedia CFA link also has a list of the recognitions that this designation possesses)

However, having worked for two years now in a "finance" role, I am not sure of how much of a value add the CFA is. The reason is that it is simply not intended for everybody who wishes to be associated with a finance role. And there lies the tragedy, in India at least. We tend to have a penchant for degrees and qualifications. Any qualification seen as sufficiently prestigious is coveted (in fact, one reason for the mushrooming of MBAs, but more on that some other time)

There is no doubt that the CFA is A solid qualification. But whether it is THE solid qualification one needs is something that has to be carefully evaluated.

A mere glance at the Body of Knowledge tells us how focused a course this is:

Another look at the exam area topic weights shows a marked progression from breadth across areas of finance to depth in studying asset classes and portfolio management:

It is totally intended for people who are looking for careers in investment research / management / banking & advisory. This is a very specific area of finance. Finance as a field is much broader. Consider:

- Commercial Banking
- Insurance
- Corporate Finance (borrowings, cash management)
- Domain Experts in Consulting / IT companies

Would CFA make a difference for people  who are working in the above sectors? My sense is - not much unless they want to shift to the field of investments. Of course, one can argue at the end of the day that one will learn something BUT theres a huge cost - the programme requires intensive preparation and is not easy. Will they be able to reap benefits which justify those costs? Probably not. And yet, directly or indirectly, I hear of plenty of people preparing for it without having a clear idea of where it will take them.

In fact, I have often felt that the number of people who want to take the exams is actually higher. The 3 year period and the 4 years of work experience actually acts as a deterrent.

For the CFA institute, here lies a really good opportunity. If they can correctly gauge the latent demand in India and elsewhere for a good general finance degree which has international recognition and brand value, I am sure it will blow them away! What they can do is to offer the first two levels of the CFA charter as separate designations in their own right. This will ensure that the "CFA" designation brand doesn't get diluted
and at the same time there is enough of a delineation to satisfy the needs of all market segments.

By splitting the designations into a hierarchy, the CFA Institute will end up doing somewhat of a differentiation in segmentation rather than a one-size fits all approach. (I am sure there's a marketing term for what I am saying - can one of the marketing studs out there help me out?)There are examples of this in other fields. The one that comes to mind right now is the Cisco series of certifications in the field of computer networks. Those interested can check out:

Of course, such complexity may not be needed in case of the CFA.

One possible scheme of things could be:

The Chartered Financial Manager designation for people who have say 1-2 years of work experience and clear the CFA Level 1 examination. It would be targeted at and useful for all those looking at a designation which gives them a broad introduction to the field of Finance. This could actually act as a good competitor to the MBA (Finance) degree since it would be faster and hold its own in terms of brand value. It will be a good option for people looking for a more focused entry into financial management, as opposed to management in general.

The Chartered Financial Market Analyst designation for people who clear CFA Levels 1 & 2 and have say 2-3 years of work experience. It would be useful for all those looking at a designation connected with Financial Markets.

And finally, the CFA designation.

Done this way, more and more people will have an incentive to take up the CFA since they have an incentive as the effort and preparation for one examination is not wasted - they get some bang for the buck in the form of a separate recognition. No doubt one may argue that the difference is largely psychological - at the end of the day, a person can always mention in his / her CV that he / she cleared CFA Level 1. However, if you place yourself in the shoes of a prospective CFA candidate, this mere difference in terminology could prove to be a clever marketing tool which changes the perceptions of people about the programme drastically. The CFA institute will be able to attract a much wider base of candidates.

Are Mr John Rogers and the rest listening?


  1. Interesting idea - however the key to popularity is the level of acceptance by recruiters - am not sure what credibility will they give to a CFA level 1 candidate, given that they are used to a CFA level 3?

  2. Jes I agree BUT the differentiation will be maintained even in case of different degrees. The certification corresponding to CFA level 1 will be recognised as an independent, basic certification in its own right. Vaguely like a bachelors and masters degree in the same field.

  3. The point I was making is more whether there would be acceptance for a CFA level 1, even as a bachelor's degree? One of the reasons for the credibility of the CFA degree is the effort required - would a level 1 be successful in retaining part of this ascribed value ? I am not sure!

  4. "differentiation in segmentation" ? Are you simply trying to say "segregation" because, "differentiation" as we have studied it, has a separate meaning altogether and used in that sense, it loosely means here to pave a new way for segmentation, which doesn't actually mean anything!

    Anyway, that apart...I agree with Jesal here professional courses, the mere fact that the course is difficult to get into/complete is what lends it the aura it enjoys. Offering a few fruits to students midway will actually lead to increased number of dropouts with "some brand value" - Is that justified? From a humanitarian p.o.v. Yes, it is. But practically, we cannot desire it to happen na? What if B-Schools follow this sort of thing - to award some sort of diploma after the first year and a PGD after the second year? Would the market - objectively - still value the PGD as much as now? I don't think so.

  5. Guys, a few points here:

    1) Yes I probably messed it up when I said differentiation in segmentation; What I meant was segmentation itself

    2) The Level 3 will still have much more recognition thatn Levels 1 and 2 precisely because it is the most difficult

    3) When I said the difference is similar to the one between bachelors and masters, I did not literally mean it is equivalent to a bachelors; I was just trying to explain that these levels would be seen as gradations in competence in the subject area, with Level 3 representing the highest mastery.