Is the CFA Exam More Difficult Now?

Perhaps an unanswerable question but candidates are always wondering if the CFA exams are more difficult now than in the past

A common question we get at Finquiz each year, especially as candidates wait for their exam scores and look at pass rates provided by the CFA Institute for prior years, is has the CFA exam become more difficult over the years.

It’s a taboo question for some. It’s probably impossible to answer with certainty and emotions get high when you start comparing your CFA exam against others’.

Let’s look at the pass rates for the CFA exams over time and then some ideas of whether the exams are more difficult now than in the past.

Are the CFA Exams Getting More Difficult?

Looking at CFA exam pass rates over time suggests that the exams are getting more difficult but there are other factors that could be involved.

  • Pass rates for the CFA Level I exam have fallen from an average of 57% over the five years through 1989 to just 40% over the last five years
  • Pass rates for the CFA Level II exam have fallen from an average of 65% over the five years through 1989 to just 44% over the last five years
  • Pass rates for the CFA Level III exam have fallen from an average of 74% over the five years through 1989 to just 52% over the last five years

cfa pass rates over time

While there is a lot of volatility in pass rates from one year to the next, the trend over the last 30 years is fairly clear. The percentage of candidates passing their exam each year is falling.

There have been a lot of changes to the CFA exams over the years and it seems the curriculum has ballooned with new material. One candidate reports seeing a CFA Level III exam with just four essay questions as opposed to the 10+ essay questions on today’s exam. A few of the topics including Alternative Investments, Derivatives and GIPS didn’t exist in the past.

So the curriculum has definitely expanded along with the body of knowledge available in the industry but are there other reasons why pass rates have fallen?

There could certainly be some intent in the lower pass rates. With ever more candidates registering for the exams, the CFA Institute may be increasing the minimum passing score to manage how many pass. While the Institute needs to add new dues-paying members every year, it also doesn’t want a massive flood of new charterholders to overwhelm the industry. There’s no way of knowing whether this is true or not because the minimum passing score isn’t public but it’s one theory.

There could also be a geographic explanation to falling passing rates. Many more candidates come from non-English speaking countries than have in the past. While English proficiency among international candidates is very good, you would expect it to be more difficult for non-native English speakers to pass the exams. I speak conversational Spanish but there’s no way I would have been able to pass the CFA exams in the language.

In the end, is there really a need to compare the CFA exam of today with bygone years to say that either is more difficult? The industry changes, requiring a different skill set of analysts and money managers. The knowledge you needed to be successful in the 80s was far different from what you need as we reach farther into the 21st century.

What we should really be asking is whether the CFA exams remain as difficult as the industry needs them to be. As charterholders and future CFA charterholders, we need to require that the Institute and our community keeps up with changing requirements in the industry and designs a curriculum that will hold to the highest standard of the past. This means continuously updating your own knowledge even after passing the CFA exams and sharing that new skill set with the Institute and within your local societies.

‘til next time, happy studyin’
Joseph Hogue, CFA

You’re Waiting for the CFA Exam Results? Why?

Waiting for the CFA exam results can be excruciating for candidates but it may not matter as much as you think

Candidates worldwide are now waiting anxiously for their CFA exam results from the June test. That’s 172,682 candidates biting their nails and pacing the floor waiting for the CFA Institute to grade their exam.

It helps to have gone into the exams with the confidence of passing but even the most self-assured candidates will have a tough time until results are released. The Institute gives itself up to 60 days to release Levels I and II of the CFA exams and up to 90 days to grade the third exam.

It seems like an incredibly long time to wait given the stress around the exams and the work you put in studying…but does it really matter? Of course it would be great to pass the CFA exam but is there a bigger picture you’re overlooking?

The Zen Approach to the CFA Exams

Maybe it doesn’t help much if you’re sitting there wondering your fate for the next year. The low pass rate on the CFA exam means just about every candidate is going to have some doubt as to whether they’ll be spending another 300 hours before next June.

But if you think about the long-term and how much one year really matters within your entire career, it starts to look a little less significant. For many candidates without the necessary work requirements for the charter, you may have years before you can use the designation and passing the exams certainly won’t mean an end to long hours studying how to be a better analyst.

Passing the exam may seem like your top goal in life right now but which is more important, barely making it through to the next level or truly mastering the material? Many of you are probably thinking it’s much better to pass the exam now and worry about mastering the material later but taking one more year to really understand the profession isn’t that bad an idea.

Putting all this in perspective helps to handle a CFA fail as well. I’m not trying to jinx your results but historically half the candidates won’t pass their exam. Getting the bad news means telling everyone that wished you well and dealing with it every time someone asks you how it went.

Resist the urge to find an excuse to blame for not passing the exam. You just weren’t ready and there’s nothing wrong with having to retake the exam. You’re in good company with most candidates having to repeat at least one level of the CFA. Look at it as an opportunity to not only get a better understanding of the curriculum but to learn from whatever study habits held you back from passing. Not only will you be ready to take on the exam next year but you’ll have learned to pull yourself up from defeat and push yourself harder in the future.

Besides being much more relaxed about waiting for CFA exam results, taking the ‘no worries’ perspective of the exam can actually help you study and prepare for next year. If you’re less worried about scoring points and figuring out the tricks to passing the exam, you’ll be better prepared to just study and learn the curriculum. Instead of spending hours ‘studying’ about studying for the exam and trying to game the system, you’ll spend that time more efficiently mastering the curriculum and becoming a better financial professional. And that’s what it’s all about!

‘til next time, just relax!
Joseph Hogue, CFA

Is the CFA Worth It?

A recent article on Bloomberg questions if the CFA is worth it but are they missing the bigger picture?

The CFA exams have come and gone and the financial media has been all over the story for the last week. From describing the challenge for CFA candidates to one recent Bloomberg piece that questions the value of the CFA charter. It’s a question often asked and without a clear answer but naysayers may be missing some key factors.

A record 172,682 candidates sat for one of the three CFA exams this month in just about every country on the globe. If history is any indication, nearly half of those candidates will fail the exam and some may need to take each level multiple times.

On the hundreds of hours it takes to study the material and the money spent for registration, whether the CFA is worth the effort is a valid question. Analytical people are drawn to the CFA through their career dreams so it’s natural they would want to place a value on their time and money spent.

CFA Not Worth It Crowd Misses the Bigger Picture

The Bloomberg article doesn’t come to a definite answer on the value of the CFA charter but the tone seems to suggest that it’s a high bar to set considering the costs. Maybe I’m biased being a charterholder myself but besides some obvious problems with the analysis, the article misses a few key points that only a candidate or CFA charterholder would understand.

The article assumes candidates spend ‘thousands of dollars’ on fees and materials for each CFA exam. While you can spend several thousand through the registration and some of the more expensive third-party study providers, ‘thousands of dollars’ is misleading and not the norm.  The standard registration fee to the CFA Institute is $860 and even the premium package on Finquiz is only $400 which leaves a lot of room to ‘thousands’. Saying ‘thousands’ is a stretch considering many candidates study only the Institute materials and even the most expensive third-party providers cost less than a thousand dollars.

The biggest point to the article is based off a Phaidon survey of job opportunities on the LinkedIn platform mentioning the CFA in the description. Nearly three-quarters (73%) of the jobs offer less than $100,000 annually which is supposed to sound low but sounds like a pretty good salary to me.

Assuming that jobs posted on LinkedIn are representative of all available, there’s a glaring problem with the survey in that no mention of geographic distribution is made. A $100,000 offer in Mumbai is considerable different than the same salary in New York City where consumer prices are 250% higher and rent is five-times more expensive.

The article does mention a survey by CFA Societies in the Midwest U.S. showing a median salary for charterholders of $154,000 – almost $70,000 higher than their peer group. If this is the median in the breadbasket, how much higher is it in the larger cities on the East Coast? Another study by InvestmentNews is reported to show charterholders make nearly 25% more than their CFP and CPA peers.

The article also downplays the credibility one gets from holding the charter. It’s hard to quantify and you can certainly find recruiters that don’t care about the CFA on a resume…if that’s what you’re looking for in a quote. I would disagree from my own experience as a freelance analyst after multiple clients have told me I was selected on the basis of having the charter.

The real benefit to the CFA charter, and just the grueling process of obtaining the charter, goes way beyond all this. The financial industry is uber-competitive and few sectors are as uncertain in outcome. In an industry where being exceptional means beating your index by a few percent, how much is it worth to have all the tools possible?

A lot of potential CFA candidates are turned off by the amount of time it takes to prepare for the exam. Upwards of 300 hours over four or five months times three might seem like a big commitment…but is it really?

Put that 900 hours into perspective against the roughly 744,600 hours you have on this earth (assuming 85 years lifespan). What else are you going to be doing with most of that 900 hours? Watching TV, surfing the internet? Is 900 hours too much to make you the professional you could be and to open the door to more opportunities?

The CFA is a crucible for the best investment and asset professionals. It’s an extremely tough process that weeds out those not committed to the highest standards and forges others into professionals ready with the tools they need to make the best decisions for their clients.

If this sounds like something that is important to you, then welcome to the challenge. If you don’t think the highest standard of professionalism is important, then we don’t want you anyway. Good luck.

‘til next time, happy studyin’
Joseph Hogue, CFA

5 Ways to Relax after the CFA Exam

Learning to relax after the CFA exam can be the payoff after months of dedication

It’s usually this time of year, just after the June CFA exam, that I post an article about what to do with all your new free time. You’ve spent upwards of 20 hours a week buried in the CFA curriculum and many candidates forget what it’s like to be…human.

I’m a big proponent of using the post-exam quiet period to keep the momentum going. I usually use this post to highlight some ways to get involved with the local CFA society or ways to learn about finance without it being from the Institute.

If you’re looking for something like that, ideas on how to get a head start on everyone else, check out some of these posts from prior years.

But this post isn’t about any of that, it’s not about learning or networking with your new CFA brethren. This post is just about relaxing!

How to Relax after the CFA Exam

I would hope you have a few ideas of what you want to do over the next few months, ways to relax and feel a little more normal. I used to put things I couldn’t do while studying for the CFA exams on a mental checklist to do after that first Saturday in June. Unfortunately, sometimes we forget or have been studying for so long that it’s hard to remember how to relax.

1) Act Like a Kid Again. Seems everything was simpler when we were kids. Maybe there’s something to that and the key could be getting in touch with the kid inside. Think about a few things you loved doing as a kid. I played whiffle ball with cousins and liked to explore my grandparents’ farm but hadn’t done either in decades until I decided to last year. It was so much fun and my cousins and I get together every couple of months now to play a game.

2) De-orgainize. Most CFA candidates are super-organized type of people. What else would you expect of financial analysts? If I don’t have a pretty good idea of what I’m going to do for the week, I feel a little lost. But sometimes we have to just let our need for organization go to relax a little. Clear your schedule entirely for a day and make a point to do anything you want (unplanned). Go for a walk and just see where the day leads.

3) Get a massage. I’m not talking about asking your significant other to rub your shoulders. Go to an actual spa and get a professional massage, in fact, make it a whole spa day just for you. You’ve earned that sauna, massage, facial package and will love the sense of peace.

4) Make a short-term bucket list. A bucket list doesn’t have to be just things you want to do before you die. Make a list of things to do over the next couple of months. Get creative and be daring. Don’t be afraid to leave home and get outside your comfort zone.

5) Read something totally unrelated to finance. Take up a hobby or read a book totally unrelated to the CFA or finance. Do something regularly just for fun. Being goal-driven personalities is one thing but we have to remember that life is short and we need to take time out to have fun.

Don’t stop with just five ideas for your post-CFA exam relaxation. Make the next few months count and have as much fun as possible. It will be January soon enough and we’ll be right back here studying for another year.

‘til next time, happy relaxing!
Joseph Hogue, CFA

5 Things to Avoid During the Last Week Before the CFA Exam

Avoid these five wastes of time and challenges to get the most of your last week before the CFA exam

It’s the last week before the CFA exam and hopefully you’re reading this from your study room hideaway just before starting a long week of nothing but cramming for the test. Taking the whole week off work to study is a great way to get those last few points you need to pass the exam.

Not being able to take the week off to focus on studying doesn’t mean you won’t have enough time though. You’ve already spent hundreds of hours on your CFA study plan and putting in 15 or 20 hours this week instead of 40 isn’t going to doom your result.

There are a few things that won’t help your chance at passing the CFA exam though and that should be avoided at all costs.

What to Avoid Before the CFA Exam

Distractions – This one might be difficult to avoid at any point in your CFA study plan but it’s crucial that you get the most of your time this week. This is it, just one more week before the exam and you can’t afford to be taking breaks and surfing online. Find a study area away from home where you will not be distracted regularly and work through the day. Take a ten minute break each hour and 30 minutes for lunch.

Too much group time – Whether you have been studying in a group so far or not, the returns to additional group time are probably limited. At this point, everyone has very specific topic areas in which they need to study most and group members’ needs may not align with yours. If the rest of the group wants to work on derivatives and risk management but you feel you’ve got the study sessions mastered, your time would be better spent studying the topics in which you need to study. Keep the lines of communication open with group members for any quick and specific questions but its best to spend your time really focusing on your individual needs this week.

Negativity and Worry – I understand it’s a lot easier to say not to worry about the exams now that it’s five years since passing the level 3 but you really do need a Zen-like perspective on it. You have done what you can and are using this last week to get those last few points. Worrying about the exam isn’t going to help you make any additional points. Calm down, put in the study time this week and accept whatever score you earn.

New study ideas and inefficient study – It’s too late to start trying out new study ideas or trying to work all the way through the official CFA curriculum again. You need to focus on what has worked in your study routine and getting the most of your time. If you have FinQuiz Study Notes and other review study aids, focus on them to get the point of each LOS rather than reading through thousands of pages in the curriculum.

Too much meta-studying – We’ve covered this one on the blog before but it’s extra important now. What is meta-studying…you’re doing it now. Any time you read something about the test or how to prepare for it, you’re meta-studying. It’s not a bad thing, you need to understand how to study in the most efficient way possible and what to expect on the exam. Just don’t use meta-studying to replace actual studying of the LOS and curriculum. Too many candidates spend a lot of time online, in different CFA forums and searching for questions about the exam rather than actually reviewing the material and working practice problems. Get what you need to know what to expect on the exam then get back to studying.

Getting caught up in some of these studying hurdles won’t necessarily doom you on the exam. If you’ve already put in the time you need then you can probably relax a little this week and go to the exam refreshed on Saturday. Spending a lot of time on these five distractions and wastes of time won’t help you either though so make sure you know that you’re getting the most from your time.

‘til next time, happy testing!
Joseph Hogue, CFA

How to Ace the CFA Level III Essays

The essay section of the CFA Level III exam is one of the toughest for candidates but you can use past exams to get an advantage

Ask CFA candidates which is the most difficult part of the Level III exam and they will almost unanimously say the essay morning section. The essay portion of the Level III CFA exam is so widely feared that it shows up as one of the top answers when candidates are asked about the most difficult part of all three exams.

The irony is that the essay portion could end up being one of the easiest parts of the CFA exams. I couldn’t wait to tackle the morning section on the Level III exam because I knew exactly what to expect and that I was going to score big points.

You can go into the third CFA exam with just as much confidence. It all comes down to using one of the best resources made available by the CFA Institute.

When else has the CFA Institute given you the answers?

It’s not even a secret but too many candidates don’t know that the CFA Institute releases the actual morning essay section along with guideline answers. That’s not mock exams or practice tests but the actual essay exams that were given in prior years and the answers that would have gotten you full points.

Normally, the Institute releases the last three years’ exams for download along with a separate download of answers. Click through here for the Level III exam prep page and copies of the past exams. Not only does the page include downloads for the last few years’ essay questions but also a brief summary of the exam structure and timing.

The essay section of the Level III CFA exam consists of between eight to 12 questions, each with between two and five sub-parts. Each question and sub-question can be worth a different amount of points but the entire morning session is worth 180 points.

In no other place does the CFA Institute give you so much help on the exams. Download every previous exam available and use it as a mock exam. Not only will it help you learn the curriculum but you will become more comfortable with the essay section and writing for three-hours straight.

We’ve covered several essay questions from previous exams, click on the Level III posts category and scroll through a few. Since the curriculum changes a little every year, questions from many years ago may not be as relevant so always make sure you check to make sure the LOS of the previous exam’s question is still included in your curriculum.

Focus most of your study on the portfolio management questions, always the first two or three questions on every exam. The LOS and required calculations for these don’t change much and doing really well on these first few questions is going to give you a huge confidence boost for the rest of the exam.

Pay attention to how the guideline answers are structured for the previous exam questions. You can save a lot of time and still get full points if you learn how to express your answer with bullet points.

As with the rest of the CFA exams, follow instructions exactly. If an essay question asks that you list two reasons, only write out two reasons. You will only be graded on the first two reasons (or however many are required) so writing out other answers is a waste of time.

The guideline answers are not necessarily the only answer you could have provided for credit but is just a blueprint of the answer for which the grader was looking. Remember, there is partial credit in the CFA Level III essay portion so write something out for every question. Even if it is a multiple part question and you don’t know all of it, write out what you can and show your calculations. Again, follow directions and show your calculations! Even if you get the final answer wrong, you may still get some points if you were on the right track.

Some of the essay questions will require that you write the answer out directly under the question while others may refer to another page for the answer. PAY ATTENTION HERE! Make sure you follow these directions. I wasn’t paying attention and put the answer to some of my essay questions directly below the question instead of on the appropriate page. Fortunately, I had enough time that I was able to copy the answers to the right page but not everyone is as lucky.

The Level III essay portion of the CFA exam does not have to be as scary as candidates make it out to be. Study the prior exams and take advantage of this huge gift from the Institute. Work at least three of the prior essay exams and you’ll be way ahead of many candidates and ready to tackle the CFA essay exam with all the confidence you need!

‘til next time, happy studyin’
Joseph Hogue, CFA

Beating CFA Study Burnout in these Last Few Weeks

Just a few weeks remain and CFA study burnout can be your biggest challenge. Use these strategies to stay strong.

There’s just three weeks left to the June 2016 CFA exam and you’re probably hitting the books pretty hard trying to get those last few points. After months of studying, many candidates face a critical challenge in these last few weeks. Whether you get tired of studying or just become less efficient, you need a plan to confront CFA study burnout.

Burnout can hit in one of two ways. The most obvious kind of burnout is when you just get tired of studying, can’t bring yourself to even look at the CFA curriculum and stop studying. You either stop studying altogether or procrastinate studying so much that you barely put in a few hours each week.

The other kind of burnout is just as bad, maybe worse. In this kind of burnout, you just zone out while you’re studying. You still put in the hours studying for the exam but it becomes like driving to work, you get to work but honestly can’t remember much about the trip. Not only are you still spending hours on the curriculum but it’s so ineffective that it’s like not studying at all.

Don’t want to throw you off your plan but want to offer an alternative in case you feel tired

Study Better by Turning Your Plan on its Head

I don’t want to throw you off your study plan so late in the game. If you feel like you’re still studying effectively and retaining the material, go ahead and keep to your schedule.

Use your CFA mock exam or test questions as a guide. If you are still doing progressively better every time you do practice problems after studying, then your studying is still paying off. If you’re getting less out of your CFA study sessions, you might want to check out some of these ideas to energize your studying.

One of the best ways to change up your studying is to use different media. This means using flash cards, study notes, audio and video in your studying. You can usually find some good YouTube videos to walk you through the bigger topics in the curriculum. These usually won’t substitute for a programmed course but can be a good way to break up the monotony and answer a few questions on difficult subjects.

Try going through a different process when you study. Do you always start out reading the curriculum then taking a few practice problems? Try starting off with practice problems or working through some flash cards. As a bonus, starting off with questions before you review the material will force you to reach deeper into your memory for the material.

We looked at some of the best places to study for the CFA in a recent post as well as what makes a great study place. Even the best location can get stale after a while and changing up your study spot can help to shake you out of a rut. Parks, libraries and coffee shops top the list of best places to study so try a few of these to see which helps to change up your routine.

If you’ve been really hitting one topic area in particular, you might try focusing on a few others for a few days. You still need to make sure you’re ready for the most important topics like financial statement analysis, ethics and equity investments but try not to overdo it. I spent so much time over the last few weeks studying equity investments for the Level II CFA exam that I caught myself skimming over important areas.

The idea is just to change up your studying to shock your brain into paying attention. The problem behind burnout is that you’ve done the same thing so many times that your brain is bored with the routine. Anything you can do to change that and make your new study plan unique should help to shake your brain out of its daze.

‘til next time, happy studyin’
Joseph Hogue, CFA

A Scientifically-Proven Way to Study for the CFA Exam

Look to science to help you learn and remember more of what you study for the CFA exam

The phrase ‘study smarter, not harder’ is thrown around a lot but candidates may not be taking the advice to heart. Studying upwards of 300 hours for the CFA exam is hard enough but even that may not get you closer to the designation if you’re not retaining the information. You truly do need to master the material in order to recall it on the six-hour CFA exam and you won’t be able to do that by just reading through the curriculum.

We’ve already talked about the power of active learnings to remembering the CFA curriculum. We only remember about 10% of what we read and 20% of what we hear through these passive learning strategies. Working practice problems, flash cards and other active learning strategies can help you remember up to 90% of the material.

I thought I would explore a few more ways science has proven the best study methods and how you can incorporate them into your CFA study plan.

Keeping from Forgetting What You’ve Learned for the CFA

Ebbinghaus published his hypothesis on the ‘curve of forgetting’ in 1885, describing how we learn and forget information. The idea is that you learn everything you can about a topic through a study event or lecture but then start to lose the information over time if it’s not reinforced. If you do nothing to remember the information, you’ve lost up to 80% of it by the second day and retain just 2% in a matter of 30 days.

The solution is to reinforce the material and commit it to long-term memory by reminding yourself of the key points. Spending just 10 minutes studying the material the day after a lecture will help boost your memory back to full comprehension. After that, it takes less time revisiting the material to remember the bulk of the topic.

curve of forgetting

Using this idea in your CFA study plan means reviewing the material you study the following day and each week for the next month. Use study notes to review the key points and then do 15 or 20 minutes of practice problems.

Use active recall to convert to long-term memory

Work published in Psychological Science by a Washington University professor on a 2009 study shows that students remember material better when they actively recall it after studying. Instead of just reviewing notes or rereading material, close your book and verbally recite the key points to a topic. Do this just after studying and before reviewing the material.

Focus on one thing and don’t multitask

I know a lot of CFA candidates like to listen to music or sit in front of the TV while studying but research proves that these distractions cost you when you go to recall the information. Studies by Indiana University and Ohio State show that trying to multitask while studying interrupts the process of absorbing and retaining the material. Study more effectively by concentrating on just one thing and limit distractions.

Change up your environment

We talked about finding the ‘perfect’ CFA study location last week but there’s science behind finding a few different places to study. UCLA psychologist Robert Bjork points to evidence that changing your study location regularly helps to improve retention. It has to do with state-dependent learning and the idea that the brain associates learned material with the environment you were in when you learned it. Change up your location every few weeks and you’ll be able to recall the information no matter where you are.

Get moving before you get learning

Exercise gets your blood pumping and that includes to the brain. Research has proven that a brief period of exercise before studying can make you more alert and better able to learn.

So incorporating these five ideas into your study schedule could help boost your memory and get you those last few needed points on the CFA exam. Remember to use active learning by working practice problems and learning through all five senses (ok, maybe not so much through touch and taste). Actively recall the material after you study and then keep from forgetting by touching on it the next day. Keep physically active and focus only on your studying at different locations.

‘til next time, happy studyin’
Joseph Hogue, CFA

 

Best Places to Study for the CFA Exam

Find the perfect spot for studying the CFA curriculum to remember more on test day

Hopefully you’ve already found your perfect CFA study location but just in case you still need to find a place for that crucial last-month studying, I thought we would look at the best places to study. Put your mind to it and you could study just about anywhere but a great study location will help you master the material and get every point possible.

Even if you’ve already got a study spot for your CFA journey, read through the points to a great study location and ask yourself if your study place is all it could be. You might be able to improve your hideaway or might even decide to look for another.

What Makes a Great Study Location?

Most study locations have one of two problems, too many distractions…or not enough distractions. Sounds confusing but consider the phenomenon of state-dependent learning. This is the idea that are brains can be trained to recall things depending on an environment, whether you like it or not. Study exclusively in a super-quiet space and you might find it maddening trying to recall things on the test in the exam room. This means your ideal study location is going to be some place public but where people are generally quiet.

A great study location should be comfortable but not too much so. You should have access to a chair that won’t annoy you after a few hours on your backside but not one so comfortable that you fall asleep. Find somewhere with upright chairs (no beanbags!) and tables or desks.

You don’t have to keep just one study location for the exam. Using a few different places might help you deal with different distractions and recall the curriculum no matter where you study. Evaluate your study performance each day on the way home, deciding if you need a different location or what you can do at your current spot.

Besides finding the perfect study location, don’t overlook finding the perfect time to study as well. If you aren’t comfortable getting up early Saturday morning to study…you might want to start practicing. I used Saturday mornings for the month before the CFA exam to take practice exams and see where I needed more work in the curriculum. By the time I went to the real exam, it was like I sat for it several times already.

Comparing the Best Study Locations for CFA Candidates

Library – This one is always first on the list of best study locations. The public but quiet spot mimics a testing environment perfectly. Many libraries even have different options like cubicles, study rooms, tables and couches. If you don’t have a library nearby, a bookstore can work just as well.

Coffee Shops – these will test your ability to ignore distractions and the availability of caffeine is a big plus in my book. Every once in a while, someone will walk in that wants to be the center of attention and will throw you off your concentration. It’s not a great study location but nice for a change of pace.

Classrooms – can make for good study locations if the school will give you access during off-hours. You might not get as many distractions as you will during the CFA exam but the environment will be very similar otherwise.

Public park – Studying outside can be peaceful if you live in the suburbs but it’s tough to lay out everything and you’ll probably have to sit on the ground. Staying awake can be a problem, especially after studying a couple of hours, and the weather can interrupt your whole day.

Maybe it’s not strictly a study location but have you considered a study-vacation? This is my favorite CFA study strategy and usually reserved for the last week before the exam. Go somewhere for a few days or more, whether 100 miles away or thousands of miles. Turn off the cell phone and don’t check your email. Set an aggressive 10-hour daily study schedule and relax the other six hours enjoying the sites. Your hotel room is an ok study location but try out a few parks and the nearest library as well. It’s the perfect combination of hardcore studying and relaxation before the exam.

Now for the worst study location, your own home! Ok, so maybe it’s better than trying to study in the middle of a rock concert but the home can be a crappy place to study. I understand it’s easy and there’s no travel time but there are just too many distractions at home. From talking to family or friends to grabbing a ‘quick’ bite to eat, you’ll lose half of your study time to little breaks. If you can get to one of these other study locations in 20 minutes or less, go for it.

‘til next time, happy studyin’ wherever you are!
Joseph Hogue, CFA

Rounding Up the Best Ways to Prepare for the CFA Exam

Use these 8 articles on preparing for the last month before the CFA exam to get everything in order

There’s just six weeks to the June 2016 CFA exam and candidates are feverishly preparing their last month study plans. One of the biggest pitfalls that catch CFA candidates is all this time meta-studying, or studying about studying. All the time you spend finding resources, asking other candidates and putting together your study plan is time you could be spending on the curriculum and getting those last few points you need to earn the CFA designation.

To help speed up the task of meta-studying  and build out your last month study plan, we highlight the best articles on preparing for the CFA exam as well as checklists you can use to make sure you’re on track. Use the articles below as your guide to plan out your CFA study schedule as well as prepare for the big day.

Best CFA Advice on Studying

This last month CFA study plan includes the tools and resources you’ll want to use to get through the material one last time before the exam. You won’t be able to read the curriculum again but these resources will help you cover as much as possible to make sure you’ve mastered the topic areas. The article also includes a strategy on how to use practice tests to guide your study plan to focus your time where it’s needed most. Includes a six-day study schedule that you can customize with your available time.

A big hurdle to effective studying is the uncertainty around whether you’ve studied enough. Candidates freak out and scramble for ideas and input on how much is enough and what more they can do. I put together this CFA study checklist to help you know that you’re on the right track or to point out some milestones you need to reach for confidence on the exam. How many times do you need to read the curriculum and other sources? How many practice problems should you do?

The last week before the CFA exam was always my favorite. In this last week CFA schedule, I talk about how to use the time as a study-vacation and how to get the most from your time. The post also includes exam day materials and a link to some important Institute pages.

Best CFA Advice on Preparing for the Big Day

This CFA exam day checklist includes everything you need to prepare for the big day. You’ll find links to a review of the typical exam day, a list of testing centers and the CFA testing center policy. This is information directly from the CFA Institute so make sure you know it.

This post on 10 ways to relax on CFA exam day has been one of our most popular this year. The chemicals released when you’re nervous won’t help you remember the curriculum or pass the exam. One of the best things you can do to get a passing score is just to relax and have the confidence that you’ve done all you could…and that it will be enough. There’s ten great ideas here so definitely a few for everyone.

Most people carry an emergency road kit in their car but do you have your CFA exam day emergency kit ready? The post includes a list of things you’ll want to put together to have on exam day. The list includes required exam materials like your passport, admission ticket, pencils and calculator. It also includes the just-in-case materials that can mean the difference between passing the exam or ending up in one of the fail bands.

This is your CFA exam day strategy, a replay of the big day starting with the night before and running all the way through the afternoon. You’ll get advice on what to eat for breakfast and important considerations for getting to the exam. I cover what happens as the exam starts and how to spend your lunch to relax and set yourself up for a successful afternoon session.

What to do after the exam isn’t something candidates usually think about but you’ll want to check out this post-CFA exam checklist. It will get you started on making next year’s exam a success by setting an email reminder and reflecting on what worked for this year’s study plan.

The important idea here is to get what you need to put your last month study plan together and then get back to studying. Don’t spend time preparing to study at the expense of actual studying and the points you need to pass the CFA exam.

‘til next time, happy studyin’
Joseph Hogue, CFA

 

The CFA and a Higher Standard for Wealth Management

The new fiduciary standard for investment advisory won’t surprise CFA charterholders, they’re already using it

The Department of Labor rolled out its final changes to the Fiduciary Rule for financial advisors earlier this month. The new rule isn’t as restrictive as many in the industry had feared but still means a lot of changes for how advisors communicate with clients.

CFA candidates and those with the designation won’t be surprised by the new fiduciary rule and may be instrumental in helping the advisory industry adjust to the new regulation.

The Fiduciary Rule Gets Watered Down

Dodd-Frank legislation in 2010 required a fiduciary rule but it took years to work the proposal through government bureaucracy. The Labor Department withdrew an early plan in 2011 after push-back from the financial services and insurance industry. President Obama called for a new version in 2015 and set the DOL to the task.

A proposal was completed in January, setting off a firestorm of criticism from financial service providers. The U.S. Chamber of Commerce even threatened to sue the federal government on the new rules and the DOL received more than 3,000 comment letters after the proposal, the majority from those in the advisory industry against the changes.

The previous rule for advisors was a suitability standard for investment recommendations. The standard was highly subjective and advisors were free to recommend products with high fees as long as they could rationalize that the investment met their client’s need for return or risk. The new fiduciary rule seeks to require that advisors act in clients’ best interest, which would imply that they recommend lower cost product options when they exist.

From what I have seen of the new rules, most of the change revolves around presenting clients with a best-interest contract explaining the fiduciary rule. I’m critical of how effective this will be in aligning advisor-client interests or whether it will merely be another paper to sign when a client opens an account. A sticking point of the proposed rules was the timing of the contract signature. It was originally proposed that advisors would have to provide a best-interest contract on first interaction with potential clients but this requirement was dropped and the new rule only requires the contract when an advisory account is opened.

The final rules still allow advisors to earn commissions on retirement assets as long as they provide full disclosure to investors. IRA providers can still recommend in-house products without having to sign contracts with investors but the products must still meet best-interest standard.

The new rules will take effect April 2017 but advisors will have until January 2018 to become fully compliant.

CFA Curriculum and the Fiduciary Standard

The CFA Code and Standards has required the fiduciary standard well before the new rule was proposed. The fiduciary standard appears in several places in the Ethics & Standards material, first in the Prudent Investor Rule and then in requirements for Soft Dollar brokerage.

The fiduciary duty shows up first in Standard III: Duties to Clients with “Members and Candidates must determine applicable fiduciary duty and must comply with such duty to persons and interests to whom it is owed.”

The Prudent Investor Rule requires a fiduciary obligation to the client which entails loyalty, impartiality and prudence (care, skill and caution). The CFA Institute requires that clients’ interests should always receive the highest priority in investment research, above the interests of the firm and of the advisor.

In the soft-dollar standards, the investment manager must fulfill their fiduciary duty through three general practices.

  • Seeking to obtain best execution through best value
  • Minimize transaction costs
  • Use brokerage (soft dollars) only for the benefit of the client

The CFA Institute Research Foundation published a literature review around Investment Professionals and Fiduciary Duties in 2014 to aid in the conversation. Now that the new rules have been finalized, CFA candidates and members can be instrumental in helping the industry to understand the requirements and to accept the changes.

‘til next time, happy studyin’
Joseph Hogue, CFA

Don’t forget your Free CFA Mock Exam!

Learn to use mock exams and CFA practice tests to guide your study plan and pass the exams

The CFA mock exams are now available on the CFA Institute website for registered candidates. If you are registered for the June exam, you have access to a free mock exam and topic tests. Both of these can be critical in guiding your study plan over the last two months and getting the most out of your time.

The CFA mock exam is designed to mimic the exam day experience with timed sections and structured along the exam topic weights. The Level 1 and Level 2 CFA mock exams include a morning and afternoon section of multiple choice questions. The Level 3 CFA mock exam does not include a section for the morning essay questions but does test you on the afternoon vignette format. The exams include the correct answers, a brief explanation of each and reference the curriculum on each question.

The CFA Institute recommends you take the mock exam towards the end of your exam preparation and most third-party mock exams take place well into May.  There’s good reason you may want to consider taking your mock exam much earlier than this to get the most from the experience.

How to Get the Most of Your CFA Mock Exam

I always thought it was odd that CFA mock exams were not held until mid-May at most local societies or third-party providers. I remember taking one mock exam on the 18th of May, just over two weeks before the June exam.

At this point, what is the mock exam going to do for you? You’ve got little time to rearrange your study plan. If you do poorly on the mock exam at this late in the game, it makes for a very stressful few weeks before the actual exam.

Getting the most out of your CFA mock exam means doing it early and in an environment that will simulate the actual test.

Ask your local society to organize a mock exam day in April or as soon as possible. It shouldn’t take weeks of planning, just reach out to candidates by email to see how many are interested and reserve a room at the library that can accommodate the group. Ask candidates to print off their mock exams and bring them to the event.

If your society cannot hold a mock exam day, you can still simulate the exam day experience by going to a semi-quiet public place. It shouldn’t be completely quiet like a solitary room but some place like the library with ambient noise.

Testing yourself in this exam day-type environment is going to test your concentration. If you find it difficult to concentrate on the exam with background noise, you’ll know to take earplugs to the actual exam in June. Testing yourself on three-hour sections will also help you see how your mental and physical stamina holds up. If you find yourself getting tired before time runs out, you should consider exercising ahead of the exam with more three-hour testing sessions.

More than anything, taking the CFA mock exam early is going to help you focus your study plan. It’s one thing to remember answers when taking short topic tests on material you’ve just studied that week. It’s another thing entirely to remember answers to all 18 study sessions all at once.

While taking the mock exam, you might want to mark the number on questions where you are unsure of the answer. This will help you review the questions that you happen to guess correctly but might need more study in the topic. Review the answers to these and any incorrect answers after the exam. Once you’re done, you’ll have an idea of how well prepared you are in each topic area. You can use this to rearrange your study plan over the last month to focus on those areas in which you need more work.

Don’t Just take One CFA Mock Exam

Also available and free to registered CFA candidates is a series of shorter topic tests. Download these from the CFA Institute website and use them for more practice.

Mock and practice exams are hugely beneficial and you should try doing more than one. Six hours is a long time to put pencil to paper and you need to train your body to not get tired. Without training over at least a few mock exams, you may not even realize how tired you’re getting and how much it’s affecting your score.

Taking multiple mock exams is also a great way to fine-tune your studying. Your first few months of studying were all about getting through the curriculum and touching on everything. Your last few weeks of studying should be about making sure you have a good understanding of everything but also making sure you get every last point where it counts.

I would recommend doing at least one mock exam every two weeks and a three-hour exam every other weekend. Try doing these in a semi-public place to get used to the noise and testing environment. You can use question banks to randomize the questions or take them in topic-order. Do this for the last month or few weeks leading up to the exam and you’ll be more confident and prepared for June.

‘til next time, happy studyin’
Joseph Hogue, CFA

10 Ways to Relax on CFA Exam Day

Learn how to relax on CFA exam day to help unlock everything you’ve worked so hard to learn

OK, so it’s nine weeks left to the CFA exams and the last thing you want to think about is exam day. You want to hear all the secrets to getting every last point and how to master the material, right?

We’ve covered study strategies, the ins-and-outs of each exam and just about every part of the curriculum on the blog. The one thing we have never covered in more than four years of the Finquiz blog may be one of the most important to your success on the CFA exams…how to relax on exam day!

CFA exam day is stressful (that should be STRESSFUL!). You’ve studied for 3+ months and upwards of 300 hours for this one day and you know that nearly half the candidates will have to repeat the same exam next year. The hormones released when we experience stress, cortisol, affects your ability to recall from your memory…and your chances for success on the CFA exam.

Now before you start getting stressed out about stress on exam day, check out these ways to relax and get the confidence you need to pass.

10 Ways to Relax for the CFA Exam

1) Put it into perspective. One year within a lifetime career isn’t really that big of a deal. I know you want to pass all three exams in three years but relax, it’s not that important. Focus on learning the material and being a better professional, exam success will follow. Think about that on exam day.

2) Meditate for five minutes. Find a quite spot at the testing center, you might have to go somewhere nearby, and just sit with your eyes closed for five minutes. Breathe deeply and relax. Know that you have done all you can and it will be enough.

3) Concentrated breathing. Concentrate on your breathing for a few breathes. Breathe deeply in and out and feel yourself relaxing with each exhale. It’s amazing how just slowing your mind and breathing can help calm you down.

4) Take some chocolate squares. Dark chocolate has ingredients that regulate the stress hormone cortisol.

5) Chew some gum. This one never really worked well for me but I’ve heard it work for other people to reduce stress.

5) Green tea contains L-Theanine, a chemical that is supposed to relieve anger and calm you down.

6) Visualize success. Close your eyes and visualize the day for five minutes. See yourself sitting down to the exam and smiling. See yourself working through the questions, still smiling because it’s easier than you expected. See yourself and a huge sigh of relief as you walk out of the test center knowing that you passed the exam.

7) Try a little cold water. Dripping cold water on your wrists and behind your ears can help calm you down by cooling the major arteries just beneath the skin in these spots.

8) Make a checklist. For me, organization is calming. Making a checklist of things I need to take with me or of things I need to study/do to pass the exam helps me to know that I’ve covered everything.

9) Stretch for five minutes. Doing some light stretching helps to relieve muscle tension and aids circulation. Start with your toes and work your way up to your neck.

10) Take a walk. It will be early morning before the CFA exam starts so hopefully it won’t be too noisy outside. Try walking a few blocks in one direction from the test center. Breathe the fresh air and enjoy the morning a little.

Everything else aside, I always found the best way to reduce stress on exam day was super-preparation. Cover the material multiple times from multiple sources, i.e. reading the curriculum and study notes, working practice problems and flash cards, etcetera. The more you study, the more confident you are going to be going into the exam. It may not be the easiest answer but it will get you the designation.

‘til next time, happy studyin’
Joseph Hogue, CFA

10 Week CFA Study Plans for Every Type of Candidate

Two 10 week CFA study plans for candidates that haven’t started and for those with a head start

We’ve got 10 weeks left to the 2016 June CFA exams and this point always seems to be a milestone for candidates. Maybe it’s just that ten is such an easy, round number that cause people to reevaluate their CFA study plans or motivate others to finally get started.

I get emails from both types of candidates. Those that started months ago want to make sure they’re on the right track. They start thinking about what they can do to change up their study plan to avoid burnout and squeeze out those last points they need to pass the exams. The candidates that haven’t managed to get started yet finally get nervous enough to crack open the books but are worried they don’t have enough time to study.

I thought I would use this week’s blog post to share some ideas for 10 week CFA study plans, one for those that have been studying and one for those just getting started. You don’t necessarily need to change up your plans if you already have a good routine but take a look at some of the ideas below.

10 Week CFA Study Plan for Candidates with a Head Start

If you’re already well into your CFA studying then revising your plan now is all about constantly testing where you’re at and changing your study plan to fill in the gaps.

We reviewed the Finquiz CFA question bank a few weeks ago and how to use it to test your progress across study sessions. You should be doing practice problems when you finish every reading and then doing more a day or two afterwards to refresh what you learned. Consider taking a half test or at least 90 questions every weekend to test your retention across all 18 study sessions. This is going to help you see where you need more studying.

If you haven’t read through all the readings yet, finish the remaining material up first. After that, go back and spend some more time on the core topic areas (those with the most points on the exam like FSA) and those readings where you are not scoring as well on practice tests.

You don’t need to read the CFA curriculum as thoroughly as you did on your first pass. Scan the official readings for the key points while using study guide notes to reinforce the Learning Outcome Statements. For your review, try to get through at least two study sessions a week.

10 Week CFA Study Plan for Candidates Just Starting

If you haven’t started studying for the CFA exam yet, or only have a couple of weeks of studying done, you’ve got a lot of work ahead of you. That 300 hours studying that the average candidate spends ahead of the CFA exam is now like a full-time job spread over 10 weeks.

There is still a chance though if you devote yourself fully to the task. If you can make studying for the CFA your job, studying eight hours a day throughout the week, you can get the necessary studying in with no problem. If you have to do your studying after work or on the weekends, it is going to be more difficult but still doable.

The difference with this 10 week CFA study plan compared to the one above is that you don’t have as much time to read through the official curriculum. The CFA curriculum is the best resource for studying but it’s just way too long when you’re pressed for time.

If you are to save the last week for an intensive review, you’ll need to work through two study sessions each week just to finish all of them. Instead of reading through the curriculum then study notes, try reading through the study notes first. This will give you a good idea of the important points and will make the curriculum reading faster and you’ll pick out those key points more easily.

Split your week into two 3-day study sessions, each one to cover one of the 18 study sessions in the curriculum. Read through the study notes and the curriculum over the first two days then spend the third day doing practice problems and reviewing the study notes one more time. Three days isn’t much to cover each study session but you’ll get through the entire curriculum in nine weeks.

One of the most important ideas for this accelerated CFA study plan is to use your time efficiently. You absolutely must study in a place where there will be no distractions. Turn off your cell phone and disable the internet browsing on your computer. You need to study straight through and cannot afford to spend your time doing anything else. If you can reserve a private study room at the library, that’s usually your best option but any quiet and uninterrupted space will work.

Whichever study plan you follow, you’ll still want to take the last week off from work for studying if possible. I always loved my last week before the CFA exams, studying upwards of ten hours to get those last points before the exam. It’s a challenging week but well worth it when you go to the exam confident that you’ll pass.

‘til next time, happy studyin’
Joseph Hogue, CFA

Does the CFA Make you a Better Investor?

While the CFA may not guarantee you earn higher returns, I believe it can make you a better investor

One of the most common questions I get asked by friends and family is if the CFA curriculum or having the charter makes you a better investor. To this question, I think the answer is yes but it’s really not the question they are asking. Most people outside the profession really mean, “Does the CFA mean you will earn higher returns?” Of course the answer to this one is no.

It might seem like semantics and you might question whether the two questions are really different. They are different and I think it’s a difference that CFA candidates need to understand about themselves and how they answer the question.

How the CFA will Make you a Better Investor

There’s no doubt that many CFA charterholders have been able to provide amazing returns for their clients. Among the charterholders I follow are Bill Gross, Abby Joseph Cohen and the near-legendary Bill Miller who’s Legg Mason Value Trust Fund beat the S&P 500 for 15 consecutive years to 2005.

But all of these charterholders have had their off-years and have under-performed their index at some point. While the long-term return on the assets they manage may be higher or lower than a benchmark, it’s not really the most important advantage they bring to their clients.

Their advantage is in how the CFA curriculum and experience has shaped them as an investor.

First, as a CFA candidate, you see much more than the narrow view that most analysts and asset managers see through their career. Most will never expose their world to the breadth of topics and investments you’ll see in the CFA curriculum. You may not need to calculate the options-adjusted spread or use Treasury options in your client’s portfolios but you have the tools to do so.

Think of two repair technicians that come out for a service call. One has a small tool box with a hammer and a couple of screwdrivers. The other has a truck filled with just about every tool imaginable, some which you don’t even know the name. The second technician is the CFA charterholder and he’s prepared for anything.

Beyond this breadth of knowledge across the curriculum topic areas, the CFA gives you a holistic view of investing and how the pieces fit together. Over the three CFA exams, you progress from the stock market basics of each topic area to working through your own solutions using what you’ve learned.

Just the process of earning the CFA charter forces you to push yourself and understand the importance of study. I’ve seen too many analysts and managers fall into a routine of doing their job but never really studying the new topics in the industry or brushing up on their skills. This leaves them dangerously behind in a very competitive industry. CFA charterholders know the value of continuing education and the Research Institute helps keep you at the front of changes in the industry.

Focusing on how the CFA curriculum may or may not make you a better investor, it’s easy to overlook the advantage you’ll get in being among some of the most critical-thinking and professional people in the business. CFA charterholders have worked hard to develop their skills and their careers and they benefit from a community that shares that hard work with its members. Learn how to tap your fellow charterholders and candidates for more than just a work reference but to exchange ideas and insight.

My opinion that the CFA experience will make you a better investor doesn’t end the debate and there’s still room for argument around charterholder returns versus those earned by other managers. I have yet to meet a CFA charterholder that felt the experience wasn’t worth it or that it didn’t make them a smarter investor or money manager.

Just 11 weeks to the June exams. Stick with it and be better for it!

‘til next time, happy studyin’
Joseph Hogue, CFA

Where to Look for CFA Jobs

While the CFA designation won’t guarantee you a job, it will make it easier to get your foot in the door

It’s always around this time of year that CFA candidates start wondering if all the work and all the studying is really worth it. The number of emails in my inbox asking if the CFA will help land a job in asset management increases and candidates lose focus on the exams.

First, don’t lose focus on your study plan and why you are taking the CFA exams. There’s just 11 crucial weeks left to the 2016 CFA exams and you’ll need every minute.

We all know that the CFA won’t guarantee you a job but it will make finding one and getting interviews easier. Beyond the jobs that require progress on the CFA, I’ve seen first-hand the benefit of having the designation when applying for positions.

Understand where to look for CFA jobs and some alternative ideas to quickly find the best opportunities.

Where to Look for CFA Jobs

The website eFinancialCareers crunched the numbers on 90,000+ resumes uploaded to their platform in 2014 and found some interesting facts on CFA jobs. More than 26% of the people looking for jobs in asset management had “CFA” listed on their resume. Other sectors of finance with a high amount of resumes featuring the term “CFA” were equities (25%), fixed-income (21%), research (21%), hedge funds (20%), M&A (17%), private banking (13%), and risk management (13%). It’s important to note that these included candidate resumes as well as charterholders and that this wasn’t necessarily hiring managers but job candidates within a sector.

The CFA Institute provides its own breakdown of where its nearly 124,000 charterholders are working with portfolio managers (22% of charterholders) claiming the overwhelming majority, followed by research analyst (15%), C-level executive (7%), consultant (6%), corporate financial analyst (5%), financial advisor (5%), risk manager (5%) and relationship manager (5%).

cfa jobs for candidates

Where you look for CFA jobs will largely be determined by how far you’re willing to move for the right opportunity. If you’re only looking for jobs close to where you currently live, then your first stop should be the job boards of the companies in your area.

Go through a list of all the CFA charterholders in your local society to see where they are employed then visit the job board of each. Make a note of any contacts you know at the company as well as the charterholders that work there.

While you can use other internet sites to find local CFA job opportunities, the real benefit is in the ability to search globally for jobs. The CFA Institute Jobline is your first stop for global jobs requiring the CFA designation or candidacy. There are more than 2,030 jobs open from 155 employers and in just about every corner of the world. The search function on the site is fairly robust with the ability to search by keyword, country, region, category and type of job.

Beyond the Institute’s jobline, I’ve always found good listings on indeed.com as well but you’ll have to weed through more bogus jobs than on professional job boards. Set up an email alert for a few keywords like investment analyst, financial analyst and equity research.

Non-traditional Jobs for CFA Candidates

Beyond the traditional career path for CFA candidates, a lot of opportunities are opening up in freelancing and alternative finance. We highlighted the growing market for crowdfunding and peer lending analysts in a recent series of posts. The demand for analysts could boom as these forms of alternative finance become more mainstream and develop secondary markets. Being ready for the opportunities may mean being proactive enough to develop your own analysis framework or model to value investments in the two areas.

Freelancing analysis opportunities are increasing along with the internet age and companies’ need to cut costs wherever possible. You may need to work on building some practical skills if you haven’t any formal experience in financial modeling but this is fairly easy to do in a few months. Beyond equity analysis, I’ve found freelance jobs in consulting, whitepaper reports and general market commentary.

There’s no singular path through the perfect career and few careers are linear at the same employer or in the same sector of finance. You might start out freelancing but find you want to leverage it into a traditional job or after working in a traditional setting, you might decide you want the freedom of freelancing. Put together a picture of what you want to do and the career path to your dream job but be flexible.

‘til next time, happy studyin’
Joseph Hogue, CFA

Warren Buffett Sounds the Alarm on Accounting Shenanigans

Warren Buffett’s comments on earnings quality is something the CFA Institute has been teaching for years

Warren Buffett recently released his annual letter to shareholders (downloadable here) and used the event to highlight a huge problem in financial reporting. As he asked investors to overlook a portion of GAAP amortization costs that depressed Berkshire profits, Buffett warned that he was hesitant to join a practice that is too common in financial reporting.

“But it is with some trepidation that I do that, knowing that it has become common for managers to tell their owners to ignore certain expense items that are too real.” (page 16)

Promoting non-GAAP results has become commonplace to smooth fluctuations from one-time items like write-downs, restructuring and pension fund contributions. The problem is that the practice may be getting out of hand. More than half the companies in the S&P 500 beat earnings estimates in the most recent quarter while more than half missed revenue expectations…that suggests some financial shenanigans and analysts need to take notice.

How Companies Trick Investors with Questionable Earnings Quality

Buffett calls out stock-based compensation as the “most egregious example” of earnings adjustments arguing that removing this as an expense is ridiculous. He’s right. I’ve always marveled at the audacity of management that’s tried to convince investors that this form of compensation is anything but an expense. While it may be a non-cash expense, it still has a significant effect on ownership and earnings.

Aswath Damodaran posted an excellent review of how companies, particularly Twitter, are inflating their adjusted EBITDA by adding back stock-based compensation. The company added back $521 million in compensation to arrive at adjusted (Non-GAAP) net income, helping Twitter to post a profit for the quarter. Stock-based compensation is not an ‘extraordinary’ expense, especially for fast-growing tech firms like Twitter.

Buffett doesn’t let analysts off the hook and says they, “often play their part in this charade, too, parroting the phony, compensation-ignoring “earnings” figures fed them by management.” Whether the analysts don’t know any better or don’t want to lose access to management, Buffett says they are “guilty of propagating misleading numbers that can deceive investors.”

Buffett also says investors should suspect the rationale of adding back depreciation charges to arrive at an EBITDA measure of profitability. For capital intensive companies, the mismatch between large capital investment and the depreciation charge leads to even GAAP earnings being higher than true economic earnings.

While EBITDA is supposed to provide a clean view of the company’s earnings power, it is here that a lot of manipulation occurs and you should do your own adjusting to find a company’s true EBITDA. Vice Chairman of Berkshire Hathaway and Buffett friend Charlie Munger has himself said that, “every time you see the word EBITDA, you should substitute the word ‘bullshit’ earnings.”

Analysts at Bank of America/Merrill Lynch sounded the alarm earlier this year as well. BofA found that 90% of companies are now reporting “adjusted” earnings, up from just 70% in 2010. Besides the need to constantly reach for more transparency in earnings, the trend may be an immediate threat as well. GAAP earnings have been negative for three of the last four quarters though “adjusting” earnings might be holding up investor sentiment artificially. Analysts need to see through the manipulation and present the case factually to investors or the whole house of cards may come crashing down very soon.

The CFA curriculum has included measures of earnings quality and income statement manipulation for years. Make sure you pay attention to the material on accounting shenanigans and the aggregate accruals formulas in the Level 2 CFA curriculum. Also, pay attention to the calculation of economic profit and how it differs from other earnings measures. Don’t be complicit in management’s game and give your clients the transparency they deserve.

‘til next time, happy analysis!
Joseph Hogue, CFA

CFA Candidates have an Advantage, and it’s Not the Designation

It’s not necessarily the designation that gives CFA candidates the advantage over their finance peers, it may be something far deeper

We’re just 14 weeks to the 2016 CFA exams and candidates are laser-focused on one thing; passing the CFA and earning those three little letters. They think the designation proves their worth to employers and to an industry where cyclical restructuring is commonplace.

Don’t get me wrong, having the CFA designation has helped me get a lot of freelance analyst jobs. I’ve gotten my foot in the door to more places than I would have otherwise, including spots on Bloomberg and consulting at venture capital firms, and I think my work on the CFA exams had a lot to do with it.

But it’s not the designation itself that helped me get all those things and it’s not your true advantage as a CFA candidate. It was my WORK on the CFA exams and what it represents.

CFA Candidates Work Hard for their Employer and their Clients

I don’t know about you but I worked hard to pass the three CFA exams and earn the designation, harder than I ever worked on two undergraduate degrees and a Masters’ degree. I’m not sure the 300 hours usually quoted as the study time it takes to pass an exam is even accurate. Besides the hundreds of hours studying, CFA candidates sacrifice their personal lives to be a better investment professional. It’s long weekends and empty libraries for three years or more just for the chance to break into an industry where you’ll be expected to work even harder.

CFA candidates have a get-it-done mentality. That’s not something you develop suddenly but something you have that is uncovered by the trials of the CFA exams. Employers see the CFA designation as a crucible that has weeded out weak job candidates before human resources has to do it.

CFA Candidates are Able to Change along with the Industry

Possibly more important than the hard-working spirit that the CFA exams show in candidates is what it says about the candidate’s ability to stay ahead of an industry that’s constantly in motion. Layoffs have been announced by nearly every mega-cap bank with Bank of America’s 16,000 dwarfed by the 50,000 planned layoffs at HSBC. The last few years are no different and these types of massive changes are only increasing as technological change takes hold of the industry.

Every segment of the financial industry is constantly in flux. An analyst that can’t stay one step ahead of others will fall behind. An asset manager that cannot innovate and evolve will see his clients jump to another firm.

CFA candidates are proactive, one of the most sought characteristics within finance. Nobody is forcing you into one of the toughest professional designations in finance. You signed up for the exams and pour over the curriculum on your own because you know it has to be done.

While the CFA designation or being a CFA candidate may bring these traits out, it’s your job to keep the momentum going after the exams. You’ll work hard in your role as analyst and asset manager, what will set you apart is your ability to push yourself even harder and keep using those characteristics that came out during the CFA exams.

The continuing education program by the CFA Institute isn’t mandatory but you should consider it as such. Take an hour or two every week to think on what you are doing for your clients and what else you can do, and learn.

As you finish the CFA exams and earn that designation, don’t forget what it really means.

‘til next time, happy studyin’
Joseph Hogue, CFA

FinQuiz CFA Question Bank Review

Use this CFA question bank review to guide you through the process of using the FinQuiz question bank

I’ve gotten a lot of questions from CFA candidates about the FinQuiz suite of study materials so I thought I would try out the question bank software. It’s been almost five years since I took a test around CFA questions but I felt confident my score wouldn’t be too bad (hopefully). I’ve kept up-to-date on the curriculum through the blog and use most of the material in my job as an equity analyst.

I got access to the CFA question bank in the FinQuiz dashboard. The first page is a filter screen where you choose which readings you’d like to test. You can also filter the questions by ones you haven’t attempted, those answered incorrectly before or bookmarked questions. You can select to score as you go, randomize the questions and select how many of the 2,345 questions you see.

Starting the Question Bank Test

The testing page shows a timer at the top along with the Learning Outcome Statements (LOS) from which the specific questions are coming. Candidates studying for the CFA exams should pay attention to the timer and keep themselves to a timed-experience to better prepare for the exam.

The questions are very similar in structure to what you’ll see on the CFA Level 1 exam. Each question is two to four sentences long including data and sometimes a data table. Three potential answers are given and provided in a multiple choice format. If you chose, score as you go, you will see the correct answer after making your selection.

You can bookmark and write notes to each question for better reviewing when you finish the test. This is helpful for marking which questions had you stumped or other notes to track your progress. Each question also includes a feedback box for sending comments or notes to FinQuiz.

CFA Question Bank Results

I did pretty well, scoring 90% on the 30 CFA Level 1 questions though I had to think about quite a few and the time ran longer than I expected. It has been quite a while since taking a test on the Level 1 curriculum but I use the material quite a bit.

The reports to track your CFA question bank performance are really helpful. Immediately after finishing the test, you see a screen summarizing your question bank results. The screen lists each question with an ID, your selected answer and the correct answer if you made an incorrect choice. You see from which readings the questions came so you can review those where you might need more work.

CFA Test Bank FinquizYou can review all the questions, those you scored correctly or incorrectly and those you bookmarked. The software gives you the option of retaking or deleting the test.

Clicking back to the dashboard shows your cumulative performance across each study session and all the question bank exams. This is a great way to track your progress studying for the CFA exam because you’ll know in which study sessions you need to review.

cfa test resultsOver 2,000 questions means you’re not likely to run out of questions and can work the question bank into your regular studying. After reading the curriculum for each study session, do the end-of-chapter questions. The next day, review the FinQuiz curriculum notes and do another 30 questions from the question bank. The following week, review the study session with another 30 question exam to make sure you retained the material.

This study routine should give you a pretty good idea of which study sessions you need to spend some more time reviewing at the end of 18 weeks. Take a few full-length practice exams using the question bank to retest the entire material. Aim for at least 75% on each study session and you may want to aim for 80% or better on the core material like Ethics, FSA and Equity.

‘til next time, happy studyin’
Joseph Hogue, CFA

CFA Level 1 Curriculum Review: Financial Statement Analysis

Reading 28 in the CFA curriculum combines the financial statements with key ratios and analysis

This is the fifth week of our CFA Level 1 review of the financial statement material. Reading 28 is your first look into the financial statement analysis and techniques that will make up a big portion of your CFA level 2 exam. In all, financial reporting and analysis accounts for 20% of your level 1 points and up to 20% of the second exam.

Check out the introduction to CFA Level 1 Financial Statements
Check out the CFA Level 1 Income Statement Review
Check out the CFA Level 1 Balance Sheet Review
Check out the CFA Level 1 Statement of Cash Flows Review

Some of the ratios and financial analysis techniques you’ll see in reading 28 have already been discussed in the separate readings on each financial statement. Besides specific techniques used in analysis, pay attention to assumptions used in different techniques and the limitations of each method.

Ratios and Common-Size Financial Statement Analysis

Ratios in financial statement analysis offer a way to standardize information and compare results across companies. It can be used to compare current results with past performance as well. Ratio analysis is limited across companies because each might operate in a slightly different product category or market. Differences in accounting practices can distort ratios and there’s no definite set of ratios that will tell you all you need about a company.

Activity ratios measure management efficiency in day-to-day operations. I’ve included some of the most common ratios used below. Activity ratios are also called asset utilization ratios. Notice that when you use Balance Sheet data in a ratio with another financial statement, you need to take the average of the beginning and ending number reported on the Balance Sheet.

cfa activity ratiosSolvency ratios measure the firm’s ability to meet long-term obligations. Liquidity ratios measure the firm’s ability to meet short-term obligations. Pay attention to the Cash Conversion Cycle which reflects the number of days a company’s cash is tied up in the operating cycle. The conversion cycle equals the number of days inventory plus days receivable outstanding minus the number of days accounts payable outstanding.

Understand the difference between operating leverage and financial leverage. Operating leverage comes from using fixed costs in the company’s business and magnifies the effect of sales growth on operating income. Financial leverage comes from the use of debt and magnifies the effect of changes in EBIT on net income.

cfa debt and liquidity ratiosProfitability ratios measure overall performance and margins. Gross, operating and net margin are used often to show different ideas of profitability.

cfa profitability ratiosIt may seem like a lot of ratios to memorize but they are fairly easy to remember after some repetition. Write the ratios and a brief explanation on some flash cards and review them each day until you’ve mastered the concept.

Common-size financial statement analysis is helpful in spotting trends within a company’s results as well as comparing accounting line items across firms. A horizontal common-size statement compares an accounting item like sales or operating expenses against itself from another year. It’s helpful in finding growth across time in each line item. A vertical common-size statement compares an accounting item against another line in the same year, usually against sales or total assets. It’s helpful in comparing the proportion of a line item in one company against another.

For common-size analysis on the balance sheet, you’ll use total assets as the common item. For analysis on the income statement, sales are used as the common item for comparison.

There’s quite a bit more in reading 28 including DuPont Analysis and some important ratios for equity analysis. All the ratios in the reading could easily show up on the CFA exam since they’re pretty easy to test in a quick question. The best way to approach the material is to understand the concept of the ratio. Instead of just rote memorization of the equation, understand what the components are and how they relate to each other. You’ll find it much easier to remember the mountain of ratios and equations for the exam.

‘til next time, happy studyin’
Joseph Hogue, CFA