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CFA Exam Process

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I get many questions on how one becomes a Chartered Financial Analyst (CFA).

The CFA designation provides strong professional credentials to a variety of careers. However, it is not an easy designation to earn. If you wish to become a CFA, be prepared for a lengthy ordeal. But one that I think is worth the effort.

There are two components in becoming a Chartered Financial Analyst. One involves passing the technical exams. The other is accruing approved work experience.

Today a look at the exam process for becoming a CFA.

CFA Institute

The CFA Institute [4] website provides information on the CFA program [5]. Please give it a read.

But I will highlight some of the current keys. Note that things can change over time, so make sure you read the CFA Institute website to know the process in the future.

The Exams

You must pass three levels before being eligible to become a CFA.

Each exam runs for six hours, split three hours in the morning and three in the afternoon. It can be a long day. That said, as time constraints hit many candidates, each three hour session can go by in a heart-beat.

Level I exam is multiple choice questions and sits twice a year (December and June). There are 240 independent questions and you are not penalized for guessing.

Level II exam is item set questions and sits once a year in June. There are 20 item set questions. Item set questions are a “mini-case” format. You receive a 1-2.5 page vignette (possibly with attached tables, financial data, etc.) and need to answer 6 multiple choice questions based on your analysis.

Level III exam is essay and item set questions and sits once a year in June. The essay component comes in the 3 hour morning session. It has 10-15 multi-part questions that require direct responses.

Even if you pass every exam on your first attempt, you are looking at 3 years to complete the program. And, according to the CFA Institute, the average CFA recipient requires 4 years to get through all exams successfully.

Passing Exams is Difficult

Exam pass rates are normally low. In June of 2012, the Level I pass rate was 38%. Level II pass rate was 42%. Level III pass rate only 52%.

Lest you think my nephew and his buddies are screwing up the results, consider the 10 year average pass rates [6] from 2003 to 2012 inclusive. Level I has a 10 year average pass rate of the same 38%. Level II is at 43% and Level III at 55%.

For Levels II and III, if you do not pass you must wait an entire year before being able to write again. That said, when I wrote my exams, Level I was also only offered once a year. So perhaps in future Levels II and/or III will also be sat more than once annually.

Why the Difficulty in Passing?

A cynic might say the CFA Institute wants to manage the flow of new Charter holders. And I am definitely a cynic. But personally, I see nothing wrong with controlling the supply of CFAs.

However, there is more to it than that.

The scope of each level is so broad that it is tough to know everything in the curriculum. Each level contains 18 different study sessions with a multitude of required learning outcomes. So there is a lot to cover if you wish to learn everything.

The CFA Institute recommends that candidates put in 6 months preparation prior to writing an exam. According to the CFA Institute, “Successful candidates report spending an average of 300 hours preparing for each exam.” [7]

With 18 study sessions for each level, the Institute suggests, “a good plan is to devote 15−20 hours per week, for 18 weeks, to studying the material. Use the final four to six weeks before the exam to review what you’ve learned and practice with sample and mock exams.”

Not the easiest thing to do if you are working a full-time job. In my case, I usually studied for a couple of hours before work each morning and then on weekends. And no, I probably did not put in 300 hours, but I did spend a fair bit of time preparing.

The Breadth of Study Sessions

Each level covers a variety of topics at different degrees of depth. The curriculum will provide a weighting for each subject area to help guide your study time.

There are four broad subject areas: ethical and professional standards; investment tools; asset classes; portfolio management and wealth planning.

Ethical and Professional Standards

All levels require a very strong knowledge of ethics and professional standards. Each level dedicates 10-15% of the curriculum to this topic, with slightly higher emphasis in Level I.

If you are weak in this area, you will likely not pass an exam. Spend more time on this subject than the weightings suggest.

Investment Tools

Investment tools covers corporate finance, economics, financial reporting, and quantitative methods.

As the name indicates, you spend Levels I and II developing the technical tools to become a CFA. As such, you spend about 50% of your time on this subject area in both Levels I and II.

By Level III no weight is given to learning investment tools. Either you know it by then or not. And you had best know it as in Level III you will need to practically apply the tools to planning situations.

I found that possessing a financial accounting background really helped in this area.

Asset Classes

Self-explanatory. You learn about cash, fixed income, equities, derivatives, and alternative investments.

Each level allocates about 30-45% of its curriculum to asset classes, with slightly more emphasis as you progress through the levels. While the amount of time at each level is similar, the depth obviously changes. You are expected to know the prior level information and build on past knowledge to deal more challenging concepts as you advance.

Portfolio Management and Wealth Planning

Portfolio management and wealth planning brings the concepts and technical tools into practice. In level I only about 5% of the curriculum deals with this subject area. By Level III, about 50% of the course focuses on this topic.

Much less theory as you progress and more real life scenarios. However, if you do not know the theory and technical components, it is near impossible to apply them in Level III.

So that is a little on the academic side for attaining your CFA designation. Three years of exam preparation requiring a lot of studying on a wide variety of subjects and with low pass rates.

Assuming you are still interested in the program, you are half way there.

Now you need to accumulate the relevant work experience. We will consider that next time. [8]