Chartered Financial Analyst

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Definition: Chartered Financial Analyst



What is the dictionary definition of Chartered Financial Analyst?

Dictionary Definition


A Chartered Financial Analyst (CFA) is an investment professional who meets standards of competence and integrity necessary to pass the CFA exam. A Chartered Financial Analyst is said to be a CFA charter holder. To become a Chartered Financial Analyst, three postgraduate level exams focused on portfolio management and asset valuation must be passed. The Chartered Financial Analyst Candidate typically takes one exam per year. Given the scope and depth of topics covered, the Chartered Financial Analyst designation is widely regarded as a prestigious credential in the asset management field. The Chartered Financial Analyst often works for a mutual fund, bank, or related financial institution in portfolio management, security analysis, or investment advisory capacity. The Chartered Financial Analyst designation is gaining status and recognition in the investment management arena similar to the CPA designation in accounting.


Full Definition of Chartered Financial Analyst


Chartered Financial Analyst (CFA) is an international professional designation offered by the CFA Institute of USA (formerly known as AIMR) to financial analysts who complete a series of three examinations. Candidates must have a U.S. bachelor’s degree (or equivalent), be in the final year of their bachelor’s degree program, or have at least four years of qualified, professional work experience in order to take the exams. In order to become a “CFA Charterholder” candidates must pass all three exams, agree to comply with the code of ethics, pay member dues, and have four years of work experience deemed acceptable by the CFA Institute. The CFA Institute’s CFA program is not related to the Indian CFA offered by ICFAI in India. CFA charter holders are also obligated to adhere to a strict Code of Ethics and Standards governing their professional conduct.

The CFA Designation

The CFA designation is a qualification for finance and investment professionals, particularly in the fields of investment management, investment banking and financial analysis of stocks, bonds and their derivative assets.

The predecessor of the CFA Institute, the Financial Analysts Federation (FAF) was originally established in 1947 as a service organization for investment professionals in its societies and chapters. In 1990, in hopes of boosting the credential’s public profile, the CFA Institute (formerly the Association for Investment Management and Research or AIMR) was created from the merger of the FAF and the Institute of Chartered Financial Analysts (ICFA).

From 1963 (when the CFA designation was first awarded) to 2006, approximately 78,000 people from at least 126 different countries have been awarded the right to use the CFA designation, 68,000 of them in the years since 1990. As of 2006, more than 116,000 more people are currently enrolled to take one of the examinations. (However, a very small number of the most senior CFA charter holders who took their exams before 1970 were “grandfathered” in, having sat only the equivalent of today’s Level III test instead of undergoing the current three-level exam procedure.)

The CFA program began in the United States but has become increasingly international with many people becoming charter holders across Europe, Asia and Australia. By 2003 fewer than half the candidates in the CFA program were based in the US and Canada, with most of the other candidates based in Asia or Europe. India and China have shown some of the highest growth from 2005-2006 with increases of 25% and 53% respectively in the total number of charter holders.

Requirements

The basic requirements for membership in the CFA program include holding or being in the final year of a four-year university degree (or international equivalent) and having four years of qualified, professional work experience in an investment decision-making process. The requirement necessary to begin the process of examination is to have four years of general work experience, a four-year degree, or a combination of both, opening the door to a broad range of individuals. The program focuses on portfolio management and financial analysis and provides a generalist knowledge of other areas of finance.

Trademark Disputes

The CFA designation is not affiliated with the Chartered Financial Analyst degree offered by the ICFAI (Institute of Chartered Financial Analysts of India) the University of India or its affiliate the Council of Chartered Financial Analysts. ICFAI offers Masters degrees in Finance which to lead to the Indian CFA Charter issued by the CCFA which is the Indian Council for Indian CFAs.

In 1998, CFA Institute’s predecessor organization, AIMR, sued and won a judgment [4] against ICFAI/CCFA. The judgment prohibited ICFAI/CCFA and its members from using the CFA or Chartered Financial Analyst mark in the United States and Canada which is now annulled.

In August 2006, an Indian court issued a temporary injunction against the Indian organization as well. [5] The judgments made no assessment of the quality of the Indian program and merely discussed the trademark violation. The Indian Association of Investment Professionals[6] is the only organization in India which is affiliated with the CFA Institute.

In January 2007, the Trademark Registry, UK refused to grant protection to the CFA charter. The word ‘chartered’ is restricted in the United Kingdom due to the association with royal charters.

In September 2007 The Trademark Registry, India refused to grant the CFA charter to CFA Institute but removed the right of the Institute to use the CFA title and as a result of this the CFA Charter and Trademark now exclusively belongs to the Indian ICFAI in India.

On May 8, 2007, the US District Court for the Eastern District of Virginia vacated a Default Judgment issued against ICFAI that the CFA Institute obtained in October 1998. ICFAI recently moved to reopen the case and to vacate the Default Judgment because the Court lacked jurisdiction over ICFAI at the time the Default Judgment issued. Recognizing the merits of the ICFAI arguments, the Court vacated the October in the 1998 Default Judgment.

With the default judgement vacated ICFAI has informed that all the Indian CFA Charter holders can now officially and legally use their Charter in the US and Canada. The bar on Indian CFA’s practising in the US has also been annulled as a result of the judgement.

However, on September 4, 2007, the US District Court for the Eastern District of Virginia reversed its decision to vacate the 1998 injunction against ICFAI after a motion to reconsider that decision was filed by the CFA Institute.

The CFA Exam

Candidates generally take one exam per year over three years and are written at a postgraduate level for financial professionals. Fees for the June 2008 exams range from $600 to $930, depending on the date at which the candidate registers to take the exam. Exams are challenging, with only 40% passing the Level I and II exams and 50% passing Level III in June 2007 (39% for Level I in December 2007). In 2006, Europe achieved the highest average pass rate for the Level I, II and III of the exam with an overall success rate of 57% of candidates; versus 54% for the USA and 49% in Asia & Pacific Asia. Although the stated curriculum is at the masters level, the first two exams are based on a multiple-choice format and historically some candidates have prepared for – and passed—the exams using only the study notes provided by third-party vendors, such as the Schweser Study Series.

  • The Level I study program emphasizes tools and inputs and includes an introduction to asset valuation and portfolio management techniques.
  • The Level II study program emphasizes asset valuation and includes applications of the tools and inputs (including economics, financial statement analysis, and quantitative methods) in asset valuation.
  • The Level III study program emphasizes portfolio management and includes strategies for applying the tools, inputs, and asset valuation models in managing equity, fixed income, and derivative investments for individuals and institutions.

All three exams are administered on paper, on a single day; the Level I exam is administered twice a year (usually the first weekend of June and December). The Level II and III exams are administered once a year, usually the first weekend of June. Each exam consists of two three-hour sessions. Level I is multiple choice – all information required to answer the question is contained in the question. Level II is item set – a vignette followed by selected-response questions. To answer each question, the candidate must refer to the vignette as there is insufficient information in the question stem. Level III consists of a session of short-answer questions and a session that is item set. On the multiple-choice/item set sections, there is no penalty for wrong answers.

Candidates who have taken the exam receive a score report that is intended to be fairly unspecific: there is no overall score for the test, only a Pass/Fail result. For each category of questions, each test-taker is given a broad range within which his or her performance falls: below 50%, between 50% and 70%, and above 70%. The passing grade for the exams has been defined as 70% of the top percentage of exam papers until 1989; since then, the grading method is not explicitly published and the minimum passing score is set by the Board of Governors after each exam. The Board of Governors review the results of a Standard Setting process and input from psychometricians. Standard Setting is a process by which CFA Charterholders from around the world review the exam and recommend, for each question, a minimum passing score for the “just qualified candidate”. The minimum passing scores for each question are aggregated and presented to the Board of Governors as a recommended minimum passing score for the entire exam. The Board of Governors is not bound by this recommendation, but does recognize it as very important information.

The CFA Curriculum

The curriculum for the CFA program is based on a Candidate Body of Knowledge established by the CFA Institute. The curriculum includes:

  • Ethics and Professional Standards
  • Quantitative Methods (such as the time value of money, and statistical inference)
  • Economics
  • Financial Statement Analysis
  • Corporate Finance
  • Analysis of Investments (stocks, bonds, derivatives, venture capital, real estate, etc.)
  • Portfolio Management and Analysis (asset allocation, portfolio risk, performance measurement, etc.)

For exams in 2008 onwards candidates are required to purchase the curriculum readings from CFA Institute. Unsuccessful candidates are required to buy the same curriculum again when they re-register for the exam.

The ethics section is primarily concerned with compliance and reporting rules when managing an investor’s money or when issuing research reports, although there are some rules which pertain to more general professional behaviour (such as prohibitions against plagiarism). There are also rules that specifically relate to the proper use of the designation for charter holders and candidates. All of these rules are delineated in the ‘Code and Standards’.

The section on quantitative analysis is dominated by statistics and time series analysis. Other financial fundamentals such as the time value of money are also addressed. The statistics topics are fairly broad, but the main focuses are risk analysis, hypothesis testing and regression analysis. For the test, only two types of calculator are allowed (the Hewlett Packard 12C and the Texas Instruments BA II Plus). The test also features other quantitative topics, but these are covered in other sections. For example, calculating depreciation of assets is a part of financial statement analysis (accounting), and determining currency arbitrage is a part of international economics.

Both micro and macro economics are covered. There are sections for international economics, mainly related to currency conversions and how they are affected by international interest rates and inflation.

The accounting section is heavily tested at Levels I and II, but is not a significant part of Level III. It is divided into financial statements analysis and corporate finance. Financial statement analysis considers the statement of cash flows, the balance sheet, and the income statement. Each of these documents gives a distinct view into the state and operations of a company. Corporate finance uses these views of the company to make decisions about projects, deciding how they will impact the company.

The section on security analysis is divided by the types of security. There is a general section on global markets, sections on equity (stocks), fixed income (bonds), and derivatives (futures, forwards, options and swaps). The first levels of the test require familiarity with these instruments, then the focus develops into correctly valuing them, and how to properly use them.

The final section is portfolio management. This section increases in importance with each of the three levels. Portfolio management is an analysis of the process of managing money. It depends heavily on all of the other topics. When managing money for others, ethics is obviously important. This section deals with how the investors’ needs are met by the portfolio manager. Modern portfolio theory is also tested: the efficient frontier, Capital asset pricing model, etc.

The Code Of Ethics

Members of CFA Institute (including charter holders and candidates for the CFA designation) must:

  • Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
  • Place the integrity of the investment profession and the interests of clients above their own personal interests.
  • Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
  • Practice and encourage others to practice in a professional and ethical manner that will reflect credit on ourselves and the profession.
  • Promote the integrity of, and uphold the rules governing, capital markets.
  • Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals

Legal & Other Recognition

  • New York Stock Exchange (NYSE) granted CFA charter holders the option to take only the portion of the Supervisory Analyst examination dealing with exchange rules on research standards and related matters.
  • U.S. Securities and Exchange Commission (SEC) may grant exemption of the Series 86 testing requirements to financial analysts passing the CFA Level II examination who also meet other requirements of the NASD.
  • U.S. American Institute of Certified Public Accountants (AICPA) granted CFA charter holders the option to satisfy the ABV examination requirements by passing the half-day Accredited in Business Valuation (ABV I) examination.
  • The charter holders of Chartered Financial Analyst (CFA) are recognized by the UK’s Securities & Investment Institute (SII) as the equivalent level of SII full membership (MSI) or fellow membership (FSI). Full membership of SII is recognized by several national investment professional bodies such as Hong Kong Securities Institute (HKSI) in Hong Kong.
  • Taiwan’s Securities & Futures Institute (SFI) has approved the Chartered Financial Analyst (CFA) designation as equivalent to a local recognised industry qualification of Certified Securities Investment Analyst (CSIA) in Taiwan.
  • The Academic and Accreditation Advisory Committee of HK’s the Securities and Futures Commission (SFC) has approved the Chartered Financial Analyst (CFA) designation as a recognised industry qualification for the licensing of Responsible Officers in Hong Kong.
  • The charter holders of Chartered Financial Analyst (CFA) who meet the competence requirement, which include both education training and work experience, may apply to register with the Hong Kong Business Valuation Forum (HKBVF) as Registered Business Valuer (RBV) in Hong Kong.
  • The charter holders of Chartered Financial Analyst (CFA) are recognized by HK’s Hong Kong Securities Institutes (HKSI) as the equivalent level of HKSI full membership (MHKSI).
  • The CFA charter holders are recognized by PRMIA (Professional Risk Managers’ International Association) as the equivalent of passing first two required exams. (PRMIA)
  • Exemptions are available for various modules in the South African Registered Persons Examination, depending on the candidate’s level. No exemptions are available for the examination on local market regulations and compliance.

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Definition Sources


Definitions for Chartered Financial Analyst are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 18th April, 2020 | 6 Views.