Back in 2009, I created a blog called Invest by Simplicity in order for me to do some “experiments”. It is still on and I wonder whether I will keep it alive or not despite the fact that I don’t post anything. Nonetheless, I did a blog post entitled “CFA… becoming useless?…no more value?” on of the relevancy (if we can say such a thing) on whether the CFA designation had any value and a year later some people still comment on the blog post. A majority seem to question the value of the CFA and other see great benefits to the CFA designation. I questioned the value of the CFA based on the popularity of the designation and on the learning materials.
Popularity = standardization?
Still today, if I am not mistaken, the popularity of the CFA is still growing (maybe less due to the financial crisis) and no one would disagree that being popular is a bad thing! Let’s face it; whatever we do in life, if it has popular support we would be all happy. In the case of the CFA designation, being more popular improves the education level of many and increases the revenue of the institute which leads to greater resources available for the institute’s members. However, there seems to be a bad trend in education when a designation or a particular degree gets more popular. What we see in the increase trend of popularity in education is the greater dependence on standardization. Standardization manifests itself, in part, in a multiple choice format exams. No room for creativity whatsoever and it is all about learning everything by heart and puke it back on exam day. Is this the proper learning method? Everyone knows that the best classes that we took as a student where the ones we actually felt like we learned something. Have you noticed that these courses rarely involve any multiple choice exams? They were more essay base exams with room for creative answers and outside the box thinking or heavy projects where professors challenge students on the basis of class materials with room for the student to explore on its own and incorporate its own perspective and findings with the class materials. Now let me say that I have no idea what the CFA exam looked like 30 or 40 years ago but I am quite sure that there was not a such heavy standardization multiple choice based exams – two exams (level 1 and 2) of 6 hours each of multiple choice questions is quite ridiculous to me. When the popularity of a program increases, schools and designations incorporate more standardization learning because it is easy and more importantly faster to grade. It is also easier to attract an increase demand for a program or designation because standardization studies (if we can say such a thing), to the eyes of many, is way easier to go through than a program that requires creativity. Have you ever realized that people rather study what can be crammed because they know the “to cram” method rather than being creative? Despite the fact that “cramming” is not necessarily easy because it requires a lot of time it is still the preferred type of exam by some people because they know that they must study what it is in the box which is finite rather studying how to cope with the environment inside and outside the box which is way unpredictable and requires creative mind to cope with infinity.
Despite the increase of popularity, I was told that the CFA made the cutoff point to the pass each CFA level way tougher. The CFA has no choice in order not to lose its “lettres de noblesses” – the actual worth the designation.
I know that the CFA level 3 is not a multiple choice exam however what is expected from CFA candidates is to apply tools of the two previous standardization exams to answer the essay base questions. Nothing against level 3 but is there room to be creative? Can a candidate answer questions with tools not taught in level 1 or 2? I am not sure but I doubt… What is expected from candidates is that the answers conform to what they have crammed in their heads in level 1 and 2.
Again, the CFA is not the only program that suffers from the negative consequences of the increase in popularity. I am 90% finished with my Masters and with academic inflation and in order for universities to generate more revenue they increase the capacity level of students within a course. At my university, students are not even required to do a thesis! In my program, 10 to 15 percent only writes a thesis whereas other students simply take more courses (which are useless because courses helps students to choose a topic for their thesis) and do a supervise project – basically an internship of four months (a mix of both would be preferred). Some Master’s courses are actually huge, similar to normal undergraduate courses where I see professors hand in standardization form of testing! It disgusts me and this trend won’t disappear anytime soon certainly with the world population having more access to Universities. I am not suggesting that I wish there would be less people having access to universities but university practices must change!
Are my concerns on the standardization process of the CFA any relevant? Let’s face it; it takes something like 3 to 5 year (if I am not mistaken) of work experience to have the actual CFA designation. Some might wonder what are my concerns are when you need real work experience to have the designation – who cares about the standardization! Well I care because the CFA exams, the way they are conducted today, are just simply useless. Will you actually learn anything from cramming exam materials? For people with no finance or economic background, the CFA may be quite beneficial for them to learn the field of finance and economics. But again, is cramming what they should be doing? Major waste of time and cash! Standardization of learning is a burden for an entire society. Learning is not made to be standardized but to be explored from many different perspective and more importantly from a trial and error of applying theoretical models, formulas, and knowledge to solve various problems. Standardization learning, to me, tries to sell what is the “truth” or the “best way” to solve problems. No one has the truth. We can’t conform problem solving. Problem solving evolves through time and the way to solve future problem is quite unpredictable and only through trial and error can we solve problems. Nothing against the institute itself but there is major room for improvement. But before I talk about a potential way to improve the CFA designation, let’s move to my second criticism: the actual material of the CFA exams.
What’s being taught – is it any good?
There are some great materials taught in the CFA exams such as financial reporting, analyzing financial statements, understanding more complex financial products, and to some extent ethics. Though, I have some issues with the theoretical base of economic and financial valuation (risk, portfolio management, stats, etc.) There have been tons of critics during the financial crisis of 2008 on the past development on theoretical finance. Efficient market hypothesis and tools such as Value-at-Risk have been negatively pointed with legitimate reason. I am personally discouraged whenever I see risk management using Gaussian (normal) distribution. Despite my disagreement (to some extent) with many application of theoretical finance like VaR, the belief in efficient markets, the idea that variance is finite (so wrong!), and valuation tools such as Black-Scholes-Merton, I still think that it is necessary for anyone in the field of finance to know and understand these and other theoretical development of finance. Again, as previously said, no one as the truth and consequently we must learn and understand what led to a certain development theoretical model, how it was proven wrong or if not yet falsified the limitations of these models, and how risky they can be if applied at 100% (despite our ignorance and incapacity at evaluating proper risk development in the future).
Now, I have two issues concerning the learning material. At first, theoretical tools that were proven wrong are still taught as if it was the way to go in financial valuations or risk management. I see no form of debate on the proper usage of these tools, why some were proven (dead) wrong, their limitations, their critics, and how they can be improve. I would like to see this for instance: Black-Scholes-Merton option pricing model was shown to be quite wrong and dangerous in various contexts (i.e. the failure of Long-Term Capital Management) but why do Warren Buffett value its put option position using Black-Scholes-Merton?
Secondly, Benjamin Graham is probably “flipping” in its tombstone every time he hears about the CFA. He’s flipping because people are not taught what they are supposed to be learning. He was, in a way, one of the founders of the CFA because he wanted a professional designation to properly distinguish between those who, at their best, properly advise investors, value firms, and most importantly understand the limitations of people’s rationality, unexpectedness, and ignorance of the stock markets. I would make CFA candidate study Security Analysis and Intelligent Investor (the two famous books of Graham). For those who read both books must have noticed something great about the valuation tools of Graham. First, they are very simple and haven’t you noticed that Graham’s perspective and tools are simply (in the best possible way) to put the odds in your favor to value firms and to maximize the protection of an investor from unexpectedness risk with realistic assumptions (if any)? He notices that humans are rationally bounded, infinitely ignorant, and markets are unpredictable and consequently develops tools and a perspective to financial markets that takes this into account. Can someone confirm any Graham analysis in the CFA exams? I am sure there are but I have the perception that they are not taught properly in the sense of that they are mixed with proven wrong financial valuation models. I know that the CFA likes to promote the idea of Graham was behind the CFA creation but are they fully exploiting Graham’s ideas?
CFA suffers from the same problems of today’s universities but since the CFA is a unique institute I believe that they should have more flexibility at modifying its curriculum. Therefore I have a potential suggestion (or we may call this an idea) that could spark some innovative process on how to improve the process for anyone to actually learn something on its way to the CFA designation (assuming that the governance behind the CFA is willing to make less money because I expect a drop in the demand from my suggestion — which I doubt but anyhow).
First, I would have one exam (really tough) which would be like CFA level 1were there would be no multiple choice questions (or maybe a 10% multiple choice on some simple common sense / knowledge questions that does not require any cramming) with essay based questions on what the CFA wants students to know in level 1 and 2 but with the adjustments that I previously mentioned . Make students go beyond what’s within the box though I have to admit, it is not easy. Plus it is really hard to grade essay based questions right? It is costly in time and money. I have to say that I don’t know how I would make it easier for graders but there must be a solution.
Now for level 2, I would make students go for a master degree in economics or finance (any subfield in econ. or fin.) and make them write a thesis to be submitted for publication to the CFA journal (if there is such a thing but I believe there is). This would force students to do understand the limitations of financial modeling and statistical tools.
For a level 3 exam, it would simply be relevant work experience (3 to 5 years about) and then after completing all three level I would grant the designation but I would add like a “premium” CFA holder designation if someone, after like 10 or 15 years of work experience finds a way to promote greater ethics or transparency (something in this genre) in the field of finance.
Wow, this was a long post. Now many might prove me wrong on many of my critics or suggestions therefore please go ahead and blast me! I might have assumed (wrongly) many things and if I you think I am completely of track – let me know! Waiting for comments (or jabs)!
Below is a presentation by Sir Ken Robinson at the TED Conference 2006 on why school kills creativity. It has nothing to do with the CFA but you’ll understand my worries behind standardization.