Isaac Adomako Boamah, a 26-year-old Ghanaian living in Accra, faces a nail-biting wait this weekend. On Monday, he will receive an e-mail telling him whether he passed two gruelling three-hour exams he sat in June. The subject? How modern finance is supposed to work.
Boamah is an investment officer at the Ghana Cocoa Board, and he knows his odds of success in the exam are poor: a mere one in five entrants passes, thereby becoming a Chartered Financial Analyst – increasingly a hurdle for those hoping to start a career in US investment banking. Or, indeed, investment banking anywhere at all.
Moreover, candidates such as Boamah will have devoted about 900 hours to solitary study over a period of four years. They will also have spent about $3,600 on books and fees, and potentially thousands more in study groups. “The CFA test is like ‘a jealous lover’,” Boamah says, reflecting on this time and money expended. “But my biggest dream is to work on Wall Street… [to] enter the doors of Goldman one day.” And with the CFA designation he believes he stands a better chance of doing so. Nor is he alone in that belief.
Boamah’s dream tells a bigger story about the globalisation of finance. Fifty years ago, a group of investment managers hit on the idea of creating a system to teach US analysts how to value US equities, in the hope that this would create a more ethical, respectable craft, akin to law or medicine. And yet this idealistic project has turned, in the past 20 years, into something much more ambitious. The CFA Institute has embarked on a dramatic programme of expansion – or “mission”, as its adherents prefer to say – disseminating its ideas around the world through “societies” and “chapters”. Due to the exam’s price – much cheaper than an MBA – and the fact that US investment banks have started using it as an entry requirement for recruits, it has attracted tens of thousands of young professionals. Alongside Boamah in June, 139,900 other candidates in 160 countries registered to take the exams. Tens of thousands are now waiting for their results on Monday.
The worldwide distribution is striking. The CFA has about 100,000 members, with more than 40 per cent of candidates this year coming from the Asia Pacific region or Africa, compared with 37 per cent from the Americas; and Asia Pacific has led worldwide growth, with a 12 per cent yearly increase in the number of candidates. The CFA is now more than an exam: it has become a cultural export. Just as Hollywood films have helped to create a common global discourse in recent years, so too the CFA Institute is shaping the way tens of thousands of young financial professionals think and speak, creating a new globalised tribe who share similar education and aspirations.
But there is an irony. Until three years ago, it was taken for granted that Wall Street was the centre of global financial capitalism – and the US a key source of intellectual leadership in investment theory. But those assumptions have been shaken by the crumbling of US financial institutions in the credit crunch and ensuing recession – and cherished theories, such as the belief that markets are rational and efficient, have come under attack. Is the CFA syllabus really the right one? And, more crucially, is it acceptable that a self-regulated American organisation, and one based well and truly off the beaten track in a southern US town, is delivering that learning?
The CFA Institute’s headquarters are on the outskirts of Charlottesville, Virginia, in a modern, three-storey red-brick building surrounded by a parking lot that looks too large for the property it serves. In the foyer, clocks show the times in New York, London, Hong Kong, Vancouver, Mumbai, Tokyo, Cape Town and Buenos Aires. Seth Wood, the slight, 37-year-old director of marketing at the institute, is so committed to the CFA mission that he describes it as “magical”.
“This eye of the needle, this crucible that is the CFA Program, transcends nature or religion,” he explains, speaking with the quiet conviction of a religious evangelist. “It is truly a meritocracy and if you can’t demonstrate you are capable, it doesn’t matter who you are, whose son or daughter.”
The origins of the CFA Program go back to the closing years of the second world war. One key founding father was Benjamin Graham, who is credited with igniting US financial capitalism by developing the idea of so-called “value investing”, or the concept that an investor should buy securities believed to have a current market price below their actual or potential worth. His fame was secured by having Warren Buffett – today one of the world’s most successful investors – as his pupil at Columbia University.
Neither Graham nor Buffett ever suffered the horrors of sitting a CFA exam. However, the CFA Institute credits Graham with setting its mission in motion in 1945 when he called for “a rating system” for financial analysts, to bring more status and order to the analyst’s craft. It was not until 1963, though, that a class of senior analysts from across the US sat the first exam. Charlottesville was chosen for the venture, according to C. Stewart Sheppard, the founding president, because of its “sylvan surroundings, away from the pressures of an urban financial centre”. The first paper concentrated on five topics that have formed the basis of the curriculum ever since: accounting, economics, financial analysis, portfolio management, and the all-important ethical standards.
During the next three decades, the operations of the CFA continued to look as sleepy as its hometown. Each year, about 2,000 US and Canadian analysts signed up for the exams, but they mostly replaced those retiring, dying or leaving the profession. Then, in the early 1990s, change came.
Don Tuttle, 76, remembers the transition well. Tuttle is one of the oldest surviving CFA “charter holders”, the name given to those who have passed Levels I, II and III of the CFA exams and have at least four years’ work experience in finance. Bespectacled and serious, he wrote the book that was to become the basis for the CFA curriculum, a quasi “bible” that distilled many of the ideas born in US financial institutions and spread them around the world – right into the home of Boamah in Ghana.
Sitting in a quiet conference room looking out at the woods surrounding Charlottesville, Tuttle argues that it was the boom in western finance – coupled with periodic waves of deregulation and crisis – that enabled the CFA to expand across the globe. As new products appeared, and cross-border capital flows accelerated, demand grew for information about how the modern financial markets worked.
Stealthily, the CFA designation became a gold standard for the globally expanding financial services industry. Goldman Sachs, JP Morgan Chase, Lehman Brothers, Merrill Lynch and Barclays were among the employers with the largest numbers of CFA charter holders. And as the banks began to embrace the CFA designation as a way of ensuring their new employees around the world had the same minimal qualification, those who wanted to break into America’s new high finance elite suddenly found that they no longer needed to go to Harvard Business School or even be in the US at all.
Through the 1980s and 1990s, the number of CFA members grew exponentially. In 1987, when Singapore became the first member chapter outside north America, there were 15,500 charter members and 5,700 candidates took the test. By 2002, membership had nearly quadrupled to 59,750 and nearly 80,000 candidates were sitting the exams. By June 2007, on the cusp of the financial crisis, membership had almost doubled again to nearly 100,000. There were more than 50 member chapters outside north America. More than 100 business schools and universities, including Oxford and Insead in France, were also associate partners of the CFA Program. The CFA Institute numbered financial stars among its members including Abby Joseph Cohen, senior US investment strategist at Goldman Sachs and one of the most powerful women in finance, and William Donaldson, former chairman of the US Securities and Exchange Commission.
Not everyone in finance became a fan. As the group expanded, a debate started to bubble up about what exactly the CFA was teaching. In the early years of its growth, the leaders of the CFA wrote the course materials based on the principles of investment theory enshrined by men such as Benjamin Graham, and updated these every few years. But as the pace of innovation speeded up, the CFA started consulting with banks and asset managers. In some ways, this symbiotic relationship – that was, crucially, free from government control – worked extraordinarily well. As cutting-edge financial ideas were developed in the 1980s and 1990s – in relation to structuring derivatives, the creation of asset-backed securities, or the valuation of equity and debt at mark-to-market prices (their current market value rather than historic “book value”) – they moved at astonishing speed from the banker’s whiteboard to the CFA curriculum. That in turn helped to create a common language of finance around the world, accelerating the dissemination of those ideas.
But there was a downside to this cosy relationship. As the CFA listened to the financial industry – and echoed its beliefs in its syllabus – an intellectual feedback loop emerged, reinforcing a sense of tunnel vision, or groupthink.
By the early years of the 21st century, it was taken for granted by the adherents of the CFA that trading in markets was a good thing – and the more liquidity (or trading activity), the better. Most CFA candidates also assumed that these traded markets were generally rational and efficient, meaning that the price of any security would eventually reflect its underlying value. Thus, it was also taken for granted that the activity of markets could be tracked – and predicted – with precision, using the type of computer calculations normally associated with, say, complex engineering.
However, the recent financial crisis has shown, with a vengeance, that markets are not always rational, as the proponents of the so-called efficient market hypothesis (EMH) would like to claim; on the contrary, they can sometimes swing wildly, in ways that defy any computer model. And – ironically enough – this widespread adherence to the concept of efficient markets might have actually made the recent upheaval even worse. The use of mark-to-market techniques to measure the value of securities, for example, sparked panic during the crisis because the market prices went haywire, triggering equally wild swings in the value of banks.
And even before the crisis, it seems as if the widespread belief in the efficient market may have lulled many investors and bankers into a deadly state of complacency. In particular, when the prices of assets spiralled upwards during the credit boom, many observers assumed that this reflected a genuine increase in their underlying value – since there was an assumption that markets were always “right”. That made it hard to spot the scale of the credit bubble – and the looming crash. Or, to put it another way, precisely because so many investors had had a similar training, they all tended to act in a similar, mechanical way – until it was too late.
A number of financial professionals confess to feeling uneasy about the CFA Institute – and the role it has played in propagating rigid ideas, including an excessive reliance on concepts of market efficiency. A senior accountant at one of the Big Four London firms privately considers the group “sinister” and says that it produces “Mormons of high finance” who live by their own rules. “The whole system is a bit bizarre,” echoes another senior analyst at a large investment bank – and a CFA charter holder. “You have this one way of thinking, and operating. It’s all about labels.”
Stella Fearnley, a professor at Bournemouth University Business School, questions the entire motivation of the CFA Institute. She believes that it is too closely aligned to the banking community, whose “sole objective is to make money”. Fearnley views the CFA Institute as no more than a “trade association, and trade associations are there to look after the interests of their members”.
The CFA Institute, for its part, stresses the importance of its code of ethics. Tom Welch, chairman of the board of governors, says one of the things that has been “really crucial” for the institute in the past two years is its role as an advocate for ethical markets, and candidates face the risk of being stripped of their charter if the institute decides they have behaved unethically. “Keeping up standards is clearly a big challenge as we get bigger,” Welch adds. “You are clearly going to get some bad apples and we are committed to dealing with that.” He is proud of the fact that Harry Markopolos, who uncovered the Bernard Madoff’s Ponzi scheme fraud, was a CFA.
Senior officials at the institute also vehemently reject any role in the recent boom and bust. “The idea that we were high priests of EMH was never correct,” says John Rogers, president and chief executive of the CFA, interviewed in his European headquarters in London’s Canary Wharf. Rogers, who served as president and chief investment officer of Invesco Asset Management in Japan, and CEO of Invesco’s worldwide institutional divisions, joined the CFA Institute last year. “We are justifiably proud of our global body of investment knowledge,” he says, “and we have always been careful about being evolutionary not revolutionary.”
And in practical terms, the CFA is now making some gestures to show that it can adapt to changed conditions. Last year, for example, the British chapter of the institute did something that might have once seemed almost heretical: it asked its members whether they still believed in EMH. To the society’s surprise, the survey showed that two-thirds of the members surveyed said they thought that investors were apt to be irrational. Armed with the results of the survey, the CFA then staged a conference in the historic surroundings of the Merchant Taylor’s Hall in London, to discuss how to respond. In a dark-panelled room, finance professors such as Andrew Lo of the Massachusetts Institute of Technology spoke persuasively about the biological roots of behavioural finance, and performed clever psychological tricks, complete with photos of gorillas, to show those present the limits of “rational” thought.
But while the London event showed that the institute is willing to debate “efficient markets”, it also revealed a practical problem: notwithstanding the shortcomings of EMH, the industry does not yet have any particularly compelling alternative. The behavioural finance theories espoused by figures such as Lo are much harder to define or translate; they cannot be easily programmed into a computer model and transposed across the world. Nor, for that matter, can they be readily turned into the type of gruelling, standardised exam questions that can be presented to candidates globally.
So, for the moment, much of the CFA course continues to draw heavily on ideas such as efficient and rational markets . And, despite the recent financial crisis, the CFA continues to spread its wings. After expanding at breakneck speed in India, the group is now seeking to influence regulatory policy in territories such as China (where it currently has 20,000 candidates). Its next big target is Latin America, which has been dubbed “the final frontier”.
“It is not a commercial organisation,” Rogers insists, who brushes off the suggestion that the CFA – which took in $200m of revenues last year – is driven by any grubby profit motive. “It is mission-driven. We are asking what a good, trained financial analyst could do to make society better. We believe it helps to make rational informed decisions about capital allocation on behalf of the ultimate beneficiary of those capital flows.”
Back in Ghana, Isaac Adomako Boamah says he has considered the effects of the financial crisis but still wants to be part of this world – boom and bust. “I really wish our markets would be as innovative as our counterparts in City banks or Wall Street firms,” he says. Or as candidate Ronnie Sarkar, 27, who was born in India but moved to the UK when he was four, says: “When I qualify, I’d like to go and live and work in the US – the CFA is their qualification and I think it will open doors for me out there: maybe even let me open my own advisory firm.” Even after two years of crisis, in other words, that all-American dream has still not died; or not, that is, for those lucky enough to get that all-important pass next week. n
Rachel Sanderson is senior companies reporter at the FT. Gillian Tett is US managing editor and an assistant editor of the FT. Gillian Tett’s last piece for the FT Weekend Magazine was about efforts by leading economists to assist the voluntary sector. Read it at www.ft.com/voluntary
Isaac Adomako Boamah, 26, Ghana Cocoa Board, Ghana
When asked to describe the effect that studying for the CFA qualification has had on his social life, Isaac Adomako Boamah, sighs. “CFA is a jealous lover,” he says. “The program is so intense, everything else pales into the shadows.”
Not that he will let that stop him. Boamah, who is an investment officer at the Ghana Cocoa Board, has a dream. He wants to work on Wall Street like his hero, Lisa Opoku Busumbru. Originally from Ghana, Busumbru now manages the day-to-day activities of Goldman’s Asia securities division out of Hong Kong.
“I hope to see her when I enter the doors of Goldman Sachs one day,” he says.
Boamah signed up for the CFA Program having been told about it by his boss, Joseph Cudjoe, who lectures at the Ghana Stock Exchange.
And Boamah’s commitment to further training has already paid off. “Even though unemployment is high … I have turned down two jobs in my three years after school,” he says.
Evgeniya Ohrimenko first heard about the CFA Program from a friend who, like her, had attended Moscow’s elite Finance Academy of the Russian Federation.
“I considered CFA a good alternative to a master’s degree in finance,” she says. “As I had different specialisations at university, it broadened my professional knowledge. It’s also valued in investment banks, consultancies and other financial companies, which gives me some competitive advantage.”
It also helps that Ohrimenko’s employer – Ernst & Young in Moscow, where she is a senior analyst – encourages its employees to take the qualification.
The biggest attraction, though, was the cost – “considerably lower” than the price of a master’s degree at a top university in the US or Europe.
Mohan Sushantam works in the Credit Card Analytics Division of HSBC North America in Bangalore. But he doesn’t plan to be there for long.
When Sushantam graduated two years ago with a degree in metallurgical and materials science from the Institute of Technology in Kharagpur, he noticed a new trend.
“Initially the investment banks just hired B-School [business school] graduates but demand was so huge that they started visiting the top technical schools,” he says.
The best students in Sushantam’s school went to JPMorgan and Goldman Sachs, and Sushantam wants to join them, which is why he enrolled in the CFA last December.
At the earliest Sushantam will qualify in 2012, and he says he may also end up “topping up” his CFA with a Financial Risk Manager qualification to bolster his prospects.
Indeed, his aspirations are formidable. “I plan to open my own asset management company and my choice of CFA is aligned to realise that dream,” he says.
Priya Khanna is an example of a new generation of mobile, highly motivated Asians signing up for the CFA Program in their thousands, seeing it as a ticket into the global financial elite.
Khanna works as an investment writer with Newton Investment Management, a subsidiary of BNY Mellon. She joined the group in early 2007, when she moved from New Delhi – via Jersey – to London, having recently married.
Her professional journey is equally intrepid.Following a degree in English at the University of Delhi, Khanna started her working life on a children’s magazine. But after a stint writing corporate literature at GE in India and Barclays in Jersey she discovered a taste for finance.
At BNY Mellon, Khanna took an Investment Management Certificate before signing up to the CFA because she “wanted to know more”. She will get her Level III result next week.
Khanna hopes the program will allow her to broaden her horizons further. “I’ve discovered that I enjoy number-crunching and I would quite like to be an equity research analyst,” she says. “Having reached this far into the program it’s given me confidence that this may not be an entirely unachievable goal.”
The dreaded exams
To get the right to put “CFA” after their name, candidates have to have a US bachelor’s degree or equivalent (or be in the final year of study) or have four years of professional work experience. They also need to pass the Levels I, II and III exams of the CFA Program and agree to abide by a “Code of Ethics”. The exams and the course books are in English.
At Level I and II candidates face multiple-choice questions and case studies. A sample multiple-choice question asks the following:
“If a firm’s long-run average cost of production increases by 15 per cent as a result of an 8 per cent increase in production the firm is most likely experiencing:
A. economies of scale.
B. diseconomies of scale.
C. constant returns to scale.”
At Level III, candidates are asked essay questions as well as case studies. The following question was asked in the June 2009 exam:
“Patricia and Alexander Tracy both retired five years ago at age 65 and their sons now support themselves. As a result of better than expected investment returns over the past five years, the Tracys’ investment portfolio has significantly increased in value. They now think that their future after-tax investment returns will exceed their expenses for their remaining joint life expectancy. Their new investment objective is to maximize the assets their sons will inherit, subject to a review of the Tracys’ risk tolerance by their financial advisor.
During retirement, the Tracys’ medical costs are fully covered by the government. The Tracys have no earned income during retirement. They have previously paid off all debt and expect to remain debt-free.
Determine whether each of the following measures has increased, decreased, or remained unchanged for the Tracys since just prior to retirement:
i. implied assets
ii. implied liabilities
iii. risk tolerance
Justify each response with one reason.”
CFA vs the rest
Among the countless finance degrees around the world, the Chartered Financial Analyst qualification has become the gold standard. Its reputation has been helped by exponential growth in the past decade and the high regard in which it is held by employers. It has about 100,000 members worldwide, and in 2010 double that number registered to take its exams. The CFA designation has been recognised in the UK as being equivalent to a master’s-level degree.
The Association of Certified International Investment Analysts (ACIIA) is its nearest obvious competitor, although with a much smaller footprint, at 60,000 members. It also has a dramatically different approach to exams. Where the CFA is a self-study qualification with course books and exams in English only, Zurich-based ACIIA produces exams in 11 languages. Study is typically led by national societies.
The CFA Program also gets some competition from specialist organisations such as the Financial Risk Manager award (FRM) and the Chartered Alternative Investment Analyst (CAIA). But these can also be complementary to the CFA Program. The Chartered Institute for Securities and Investment, with 40,000 members in 89 countries, also offers investment qualifications.
In practice, the biggest competitors to the CFA Program are probably masters in finance or masters in business administration degrees. CFA Institute executives rarely promote the CFA Program as a direct rival to an MBA as the program has partnerships with business schools and universities, including Oxford, Insead and Cornell. But many CFA candidates admit to choosing the CFA course over an MBA because it is much cheaper – $3,600 versus $15,000 for a second-tier business school – but is held in equally high regard at many investment banks.