By David Harper, CFA, FRM, CIPM ============================ CFA versus FRM I often get this question about the CFA versus the FRM. I don’t have a great answer because: Individual goals vary (we want different things from our certifications), Job markets are diverse. The CFA is helpful if you want to work in equity research or, say, become a distressed debt analyst. The FRM would be more relevant to a risk manager (but the FRM, at the moment, is probably not a prerequisite for any job). For other Financial Services jobs (e.g., consulting, sales, management), these credentials are elements that complement your overall presentation. Like the MBA (which has suffered some commoditization), they don’t buy you advancement per se, rather they enhance your portrait. It’s getting harder to generalize about job markets, even accounting for their diversity. Almost across the board, there is a higher bar on technical skills (e.g., visual basic) or specialized knowledge (e.g., CPA, SOX) Please also note that under the financial certification umbrella, you have more and more choices. Each with their own focus. Just two examples. In alternative investments, we now have the Chartered Alternative Investment Analyst. In performance measurement and evaluation, the CFA Institute recently opened a Certificate in Investment Performance Measurement. Certification fragmentation, I suppose, follows naturally from the trend toward skills specialization. Why do we sit for these financial certification exams? Both exams make extraordinary demands on your extracurricular time. A professional analyst once told me he hadn’t sat for the CFA because it would require “giving up my Spring and my Summer” (that would be, in the case of the CFA, three years or six sacrificed “seasons”). I think he is roughly accurate about both exams. According to the published guidance, the CFA Level I requires a “minimum of 250 hours hours of study.” And while GARP does not, to my knowledge, provide formal timeline guidance for the FRM, I think the average FRM candidate probably needs at least 250 hours of study before the exam. Some can spend less time, but I bet among the majority who fail the FRM, their main regret is they underestimated the amount of preparation time required. But notice one difference already: the CFA is a minimum three year commitment (work experience aside) and the FRM is a one year commitment. Although the FRM is harder than any one CFA Level. I’d say it is about 150% - 175% more difficult than the Level I CFA. Why sit for these exams? I can think of two reasons: To get a better job (or enjoy the prestige of a respected credential) To learn (new material, refresh old material) Walter, if you don’t mind, I will divide my answer into two posts. First, about the job market (“is it worth taking…?”). In a second, I’ll dissect the exams themselves. Job market trends Broadly, I perceive the following general trends concerning job markets in financial services (my perspective is partially informed by Pablo Triana’s expert overview in the September/October Risk Review): Quant Finance occupies rarified air where the CFA/FRM won’t really help you: Surely the headline in recent years is the soaring popularity and importance of Quantitative Finance, or if you like, Financial Engineering (the domain of the “Quants”). This will continue and I seriously doubt the recent subprime fallout, however bad, will put any dent on the demand for this talent. At the top of the skills pyramid, demand for quants will outpace supply for the foreseeable future. But the Quant Finance professional track is a specialized market; you need a Masters in Financial Engineering or a PhD to compete here. (I am not aware that either the CFA or the FRM even help, as much as I’d like to wish otherwise! I consulted for KMV years ago before they were acquired by Moody’s and, those Quants were pretty typical in their disdain for anything less than a PhD. They viewed the CFA program as a sort of finance primer, maybe sort of like a nice extracurricular activity.) But Basic Quant and General Finance (quantitative talent) are relevant everywhere and more important than ever: Below the speciality level of hard core Quantitative Finance, basic quantitative skills and general finance (e.g., CFA or FRM) are becoming more relevant to all finance jobs. Years ago, when I consulted to asset managers, a typical relationship manager was an old-school salesperson. One prominent advisor to major pension funds quipped to me, “Do you know who gets the pension fund business?..the guy who bought the last cocktail.” But this has changed. As the business has gradually institutionalized, the jobs have become more professional (i.e., requiring threshold sets of competencies). Nowadays, the salesperson (relationship manage, account manager) is often financially sophisticated. Often he or she has an MBA or maybe even a CFA. The bar has been raised. You now compete with talented hybrids. Students get credentials earlier. And experienced workers add credentials. Many are not satisfied to be mere experts (nobody wants to be an “expert in a silo” where they cannot understand how their expertise connects to the business), they want be facile across disciplines. And, if you think about it, leaders must bridge disciplines. You see more hybrid personalities: people who are expert in one domain and impressively exposed to additional domains. There seems to be everywhere a recognition that all key jobs are, to some degree or another, interdisciplinary. Nowadays, on the supply side, recent MBA graduates are often triple threats: the graduate degree, a “first degree” in a hard science (e.g., math, engineering), and off-path, valuable real-world experience (e.g., product manager). About the CFA The CFA was traditionally a credential for the sell-side equity analyst at an investment bank. But its appeal has broadened over the years. It is now typical to see job descriptions for Consultants that “prefer an MBA or a CFA.” Or, the following are among the requirements for a Strategist at a major money manager: “1. Bachelors, Masters, or PhD in a quantitative subject (math, statistics, economics, finance); and 2. CFA, Actuarial or similar professional qualification.” In many cases, the CFA has more perceived value that an average Finance MBA (unless the Finance MBA is earned from a globally prestigious school). I sort of view the CFA as the today’s Finance MBA. The Finance MBA, in my opinion, has suffered gradual commoditization over the years and is sort of stuck in the middle between two dynamic markets. One, true mathematicians with PhDs or Master’s in Financial Engineering are wanted for the Quant jobs. Two, the supply for generalists now includes many streams of qualified, non-MBA candidates (e.g., economists, experienced workers; and my pick for tomorrow’s hot job, anthropologist). And firms are more eager to directly recruit exceptionally talented undergraduates, some of whom amass credentials like the CFA seemingly before they’ve worked much. Nowadays, an average Finance MBA plays a merely supporting role in a candidate’s overall presentation. But the CFA still has glossy sex appeal. On the hiring side, the CFA enjoys a prestige that was, years ago, attached to the Finance MBA. Pretty much everybody knows what the CFA is, and they respect what it signifies about your education. Organizationally, the CFA Institute is bigger and more mature than GARP; conversely, GARP is growing faster while the CFA has announced it is now entering its second big phase, dubbed the “Membership Era.” Translation: we won’t be adding new members as rapidly as in the past, so let’s focus on our existing members. But the larger size and maturity of the CFA Institute confers the following perqs: One of the best job boards on the web (I routinely get requests to post jobs under my account due to the focused audience) A voluntary continuing education program that was good even before the CFA recently increased their focus on, and their resource allocation to, continuing education. The CFA Institute has fabulous continuing education resources The actual exam is the gold standard of financial certification exams. From soup to nuts, it is truly marvelous. The body of knowledge is carefully undated each year, their authors are typically “the final-word Gurus” in their area (e.g., Fabozzi in Fixed Income), and their reading materials continue to impress me each year. Recently, the readings were bundled into the exam; e.g. a six volume set for Level I. I think this six-volume set for Level I is just about the best, most well-organized introduction to finance that you can find anywhere. If you could take only one finance text on your desert island sabbatical, I think it should be the Level I CFA readings.
cool find, I’d say I agree with most of this
Are there Schweser notes for you post above. It is tooo long to read!?!?
Preparing for GMAT… So, whatever comes, I think of that as a reading comprehension practice w no questions following…