Why the CFA Designation is Losing Value

The CFA Institute made changes to its exam process over the past year. And I believe this will lower the value of the CFA designation. After having passed level 1, 2 and 3, I’m a bit disappointed in these changes… or more so the explanation I got.

People who’ve passed the exams have to have a solid understanding of statistics. Did they really not expect us to read between the lines? 

Everyone who I’ve spoken with that’s gone through the exams feels a similar way about the changes. Although, most of them didn’t want to speak up in fear of damaging their reputation with the CFA Institute. And to be honest, that crossed my mind as well. 

Although, I really hope voicing my concerns won’t be an issue. Let’s take a quick look at the CFA Institute’s mission statement… 

To lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society.

With this mission statement, it’d be a mistake to not allow people to freely share their different opinions. Even when they don’t align well with some of the Institute’s actions. This is vital for efficient markets as well. So, here we are… 

The recent changes that are chipping away at value of the CFA designation are the increase in attempts and decrease in time to take the exams. And this might seem small but it ties into a much larger trend. The CFA Institute is a non-profit… but from what I’ve learned, non-profits can be very profitable. We’ll get to that in a moment. I’ll also give my opinion on if taking the CFA exams is worthwhile, as well as compare to MBAs (that’s a common question I get)… but first, the changes to the exams… 

The CFA Exams Go Digital 

The pandemic disrupted many industries, and the world of taking tests – in-person at least – wasn’t exempt. As a result, the CFA Institute has ended its 60 years of paper-based testing. And for several years, the CFA Institute was already preparing for this change. That’s to modernize since most of us work in front of computers all day anyway. But a little caveat: in-person skills are still extremely important. 

The most common pushback is that this is a money grab since the exam fees aren’t changing. Although, the CFA Institute has confirmed that the costs of deploying computer-based exams are higher than the paper exams… I haven’t seen a breakdown and I believe there’s more to consider on this end… but either way, here are the main issues I see… 

CFA Exam Attempts Double 

Pre-pandemic, level 1 was offered two times a year. And for levels 2 and 3, you’d only get one attempt a year. If you failed, you’d have to wait a full year for another attempt. And the pass rates hover around 50% depending on the exam. This pressure made the exams more challenging. And companies seek out employees that can work well through stressful situations. 

Going forward, the number of attempts in a year has doubled. There are also exam windows instead of a uniform date. Of course, there are some accessibility benefits but here’s the problem… 

In any given exam attempt, all else equal… or more so, study time equal, your score will deviate. Throwing a rough number out there… maybe by a standard deviation of 8%. People have good test days and bad test days. So, doubling the number of attempts in a year, would increase the overall chance of passing… and once again, the exams require a decent understanding of statistics. Did they not expect us to see this issue? 

I even asked a Senior CFA Director about this on LinkedIn… 

Response from CFA Institute about exam changes

What? I’m sure he was busy and I’m happy he responded… although, it didn’t clear anything up. 

Also, with the increased CFA exam attempts, retention is a potential problem. And to be honest, this isn’t as clear. I’m going out on a bit of a limb. But having to learn/re-learn the concepts over a year might lead to better long-term retention. Once again, this is a minimal consideration but still worth thinking about nonetheless. 

Issue With Changing Exam Length 

On top of that, the exams dropped from six hours to four and a half hours. The CFA Institute has said… “a longer exam does not actually provide more insight into a candidate’s knowledge or mastery of the material.” And given the context of these exam changes, that lines up. Similar to dwindling benefits of diversification, the same holds true for more questions. But this is only looking surface level. 

Looking deeper, I’d argue that there’s a little more value from the process itself. A longer exam is more stressful and how a candidate performs in the first 30 minutes might be different than the last 30 minutes. 

Longer exams require a higher level of sustained concentration. And last time I checked, this is a valuable skill. Many financial institutions require long workdays. It’s common to hear investment bankers putting in 12+ hour days… so, testing for sustained performance is useful. The military and many other industries clearly value this as well. 

CFA Charterholder Dilution and Executive Compensation 

Overall, the CFA Institute is making the exams shorter and more accessible. They’re lowering some of the testing barriers. Once again, this isn’t all bad but it will likely increase the total number of candidates when the world returns to normal. Leading up to the pandemic, we saw a big climb in the total number of exam candidates… 

Total number of CFA exam candidates

It climbed from about 166,000 in 2014 to 270,000 in 2019. That’s a cumulative annual growth rate of over 10%. And in 2020 and 2021, it’s thrown off with the pandemic but I’m sure it will climb much higher in the years ahead. 

There are many trends behind this. Education is becoming increasingly important and people need to do more to stand out. The CFA Institute also offers other products as well… with these, I’m guessing there’s some internal motivation to expand. And although the CFA Institute is a non-profit, it pays very well… 

According to the 2021 proxy statement, the CEO made $845,200 in fiscal year 2020. That’s followed by the Chief Financial and Risk Officer who brought in just over half a million. Of course, there’s the argument that you have to pay big for the best talent. But still, this seems a bit high for a non-profit.

Also, it’s good to note that the past CEO made over $1.5 million in 2019. If the new CEO sticks around as long, her total compensation might climb that high as well. It really depends on how the incentives are set up. And unfortunately, I couldn’t find a breakdown. Although, I’m guessing the executives are incentivized to expand the number of candidates. 

So, I believe the recent exam changes are going to increase the number of candidates. These changes are chipping away at the value of the CFA designation. Although, overall… 

Are the CFA Exams Still Worth It? 

If you plan on breaking into and moving up in the financial industry, the CFA designation is still valuable. Even with these little changes, passing the exams won’t be easy. And personally, I still have a great deal of respect for anyone that is able to make it through the exams. The program requires a lot of sustained motivation and you’ll gain a better understanding of financial markets. 

To answer the CFA vs. MBA question. Which one is better? I’d say on average the CFA designation is more valuable, especially if you’re going into the financial industry. When it comes to MBAs, they’ve been watered down over the years… 

Many schools offer MBA programs and they’re not as good due to lack of consistency. So, it really depends on which school you’re getting your MBA from. And throwing a rough number out there, I’d say 90% of MBAs probably aren’t worth it. 

Given my field of work and interests, I’ve gone with the CFA exams. But I’m wary of the recent changes, as are many others that have taken the exams. Hopefully in the years ahead, the CFA designation doesn’t follow the footsteps of MBA monetization and value dilution. 

Invest mindfully,

Brian Kehm

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