Key Points:
• The Chartered Financial Analyst® (CFA®) charter is a globally recognized distinction awarded to individuals who demonstrate mastery of financial analysis and commitment to high ethical standards.
• The CFA Program includes three levels of tests with relatively low pass rates. The CFA Institute recommends at least 300 hours of preparation for each test.
• In addition to passing the tests, candidates must satisfy a handful of other requirements, including possessing an international passport, applying for admission to the CFA Institute, and keeping their membership current with dues and training.
• CFA® charterholders work in a wide variety of professions, but many become investment analysts or financial advisors.
• Because of how hard it is to receive, the CFA® charter is considered a gold standard for financial analysts.
The Chartered Financial Analyst® (CFA®) charter is a globally recognized distinction awarded by the CFA Institute to individuals who meet certain education, experience, and ethics requirements, pass all three levels of the CFA® exam, and who become dues-paying members of the CFA Institute. The CFA® charter signifies excellence in financial analysis and opens doors to a multitude of professions in the financial services industry. Investment analysts and financial advisors are among the most common professionals to seek and/or attain the CFA® charter.
The CFA® charter is extraordinarily difficult to attain. Like other certifications, qualifying for it depends in large part on undergoing rigorous education and examination, including three levels of demanding exams. Collectively referred to as the CFA Program, the exams are separated into Level I, Level II, and Level III, comprising the Global Body of Investment Knowledge, which takes some 85 pages just to list all of its topics.
Each exam lasts six hours — including three-hour morning and afternoon sessions — and covers areas such as ethics, accounting, money management, economics, security analysis, and much more. To give a sense of just how difficult the tests are, data released by the CFA Institute indicated that, between 1963 and 2016, 1.3 million candidates sat for the Level I exam, but only slightly more than 200,000 passed the Level III exam — a little more than 15% of the initial group.
Successfully attaining the charter goes beyond passing the exams. Qualified candidates must have a bachelor’s degree and at least four years of relevant experience in the financial services industry. Additionally, prospective CFA® charterholders must apply for CFA Institute membership, including two letters of recommendation (ideally from other CFA® charterholders) attesting to their ethics, character, and other non-quantitative characteristics. Like other certifications, membership must be renewed annually, both by demonstrating commitment to ethical investment management and by paying dues ($275/year).
Because of how difficult it is to attain, its global significance (the CFA Institute recognizes charterholders in 164 countries), and its ethical basis, the CFA® charter is widely considered to be the gold standard for investment analysts. However, the CFA Institute indicates that the charter alone does not guarantee that one investment analyst is superior to another, and that it is against their ethical code for charterholders to suggest that they are. Rather, the charter indicates that an analyst is dedicated to exemplifying a high level of education, ethical, and professional standards in the investment industry.
In short, the charter indicates that a person is deeply serious about their financial services career from both skills and ethics perspectives. It shows that an analyst has invested hundreds — if not thousands — of hours in education and training, and that they are passionately committed to excellence in the field. As of data released in 2020, the CFA Institute recognized roughly 167,000 CFA® charterholders around the world.
Why do people seek the CFA® charter? Once they get it, what do they tend to do with it?
In short, people seek the CFA® charter because it presents an enormity of professional upside. It is considered the highest mark of distinction for investment analysts, and applies to a wide range of professional functions, including equity portfolio management, corporate financial analysis, investment banking, buy- and sell- side research analysis, and much more. Many CFA charterholders work for large investment banks and mutual fund companies, and about 5% become financial advisors.
The CFA Program is considered by many to be highly cost-efficient, especially as compared against MBA programs. While MBA programs often cost in excess of $100,000, the CFA Program tends to cost about $10,000. CFA® charterholders make an average yearly income of $300,000, and so many are compelled by the high potential return on investment of completing the CFA Program compared to secondary degree programs.
Furthermore, while there are roughly 167,000 CFA® charterholders around the globe, more than 100,000 MBA degrees are awarded annually in the U.S. alone. Because it is such a tiny segment of the population (about .002% of the global population), the CFA® charter is a highly impactful distinction.
Unlike other types of training, the CFA® charter is not a method for people to jump-start a struggling career. Rather, CFA® charter candidates have already demonstrated aptitude and promise, and the charter itself is a way of augmenting and commemorating their skill-sets and knowledge bases. Upon becoming CFA® charterholders, individuals become qualified to work in senior- and executive-level positions.
How tough is the CFA Program?
The CFA Program is extremely difficult and time-consuming. The examination process is divided into three levels, and to prepare for each level, the CFA Institute recommends at least 300 hours of studying. Preparation time alone often exceeds 1,000 hours.
Even following these preparation guidelines, there is no guarantee that candidates will pass the tests. In fact, pass rates for the Level I and Level II tests regularly sit at about 40%. Plus, nearly a quarter of people who sign up for the Level I test don’t even show up on the testing date, presumably out of lack of preparation or intimidation at the test’s difficulty.
Thus, there are many built-in features of the CFA Program that weed out candidates who are not consummately committed to excellence in the field of financial analysis. This intrinsic difficulty is what sets the CFA® charter apart; there are a multitude of obstacles on the way to becoming a charterholder, and only the most committed succeed.
How does the multi-level testing process work?
Each test is designed to measure a different aspect of candidates’ knowledge of and experience with financial analysis. The Level I test focuses on knowledge, the Level II test focuses on knowledge application, and the Level III test is a synthesis of all concepts and analytical methods in the curriculum. Each test lasts six hours.
Here are some more specifics related to each test level:
• Level I — The Level I test consists of 240 multiple choice questions. It is the only one of the three that is offered twice per year (in June and December). This may be due to the fact that it has the lowest pass rate of the three — 41%. (CFA candidates may retake the tests as many times as they like — unlike the CFP test, which limits retakes.)
• Level II — The Level II test consists of 21 item sets in the form of mini case studies, each of which contain six multiple choice questions. The Level II test is offered only once per year (in June). Its pass rate is slightly higher than Level I’s, at 44%.
• Level III — The Level III test consists of 12 essay questions, each of which have multiple parts, as well as ten multiple choice questions. It is the only test of the three to have handwritten answering and grading. Like the Level II test, it is offered once a year (in June). At 56%, it has the highest pass rate of the three. Its relatively high pass rate may have more to do with the quality of candidates who reach it than its inherent difficulty level.
Each test is graded on a pass/fail basis. 70% or more correct answers constitutes a grade of “Pass,” while anything less than 70% constitutes a “Fail.” The CFA Institute does not release specific grades to any recipients, but it does tell them if they got more than 70%, between 50% and 70%, or less than 50% of the answers right. This information is useful to candidates who fail the tests as they reevaluate their study methods going forward.
Passing tests is certainly the most difficult part of becoming a CFA® charterholder, but it does not guarantee that a candidate will become a CFA® charterholder. Candidates must also possess an international passport, apply for CFA Institute membership, and, once accepted, pay annual dues and keep their membership current.
Top-Tier Analysts
As you can see, the CFA® charter is administered relatively rarely, and not just anyone can become a CFA® charterholder. It takes an enormous amount of time, dedication, and commitment. Due to the low pass rates and the infrequency with which the tests are administered, many who fail one of the tests are deterred from retaking them and completing the CFA Program. This exclusivity ensures that CFA® charterholders are truly masters of financial analysis.