Katrina Kruger of the Chartered Financial Analyst Society responds to last week's column by Brian Gaynor
Brian gaynor's July 10 column headlined "Save seat for old pros in adviser school" highlighted that, in the past, financial advice has sometimes been given in New Zealand by individuals with little formal training or experience.
The CFA (Chartered Financial Analyst) Society of New Zealand shares this concern and has been an active participant in the process of developing new standards for the industry.
However, some readers may infer from the article that becoming a CFA Charterholder is an "easy" way to achieve the Standard Sets and, as a result, younger CFA Charterholders may lack the knowledge and experience to provide suitable financial advice.
Nothing could be further from the truth as obtaining the CFA charter involves much more than just passing an exam and, importantly, includes a requirement of four years of acceptable work.
Gaynor is correct in noting that the Code of Professional Conduct for Authorised Financial Advisers released last week included an exemption for CFA Charterholders from Standards Sets C and D.
This exemption followed comprehensive submissions from the Society which mapped the competencies in these Standard Sets with the material that was set out in the CFA curriculum.
The CFA curriculum is grounded in the practice of the investment profession and evolves with time.
Through a process called "practice analysis", a survey of investment professionals from around the world, the CFA Institute is able to update the curriculum with knowledge, skills, and competencies that are relevant to the profession, ensuring that practical rather than academic considerations decide the content of the programme.
The high relevance of the CFA curriculum is one reason why the CFA charter is recognised as the gold standard in the investment industry, there being over 90,000 CFA Charterholders in over 130 countries.
Moreover, numerous regulators around the world (including Australia, Canada, Germany, the United Kingdom and the United States) accept the CFA charter as a proxy for many licensing requirements.
Gaynor's choice of Warren Buffett as an example of someone who would not be exempt from any of the Standard Sets is full of irony as it was Buffett's teacher Benjamin Graham who, in the 1945 edition of The Analysts Journal, argued for a badge of competence for investment professionals. This eventually led to the first Chartered Financial Analyst exam being held in 1963.
The first question in that 1963 exam was a case study focusing on what advice the candidate would give to a 55-year old investor called Cartman. Decisions about Cartman's life insurance, equity investments and fixed-income assets would not be too dissimilar to those that face financial advisers in 2010.
Today, the CFA curriculum is tested in three six-hour exams that must be passed in sequence. The exams cover topics including ethical and professional standards, quantitative methods, economics, financial reporting and analysis, corporate finance, investment tools, asset classes, and portfolio management and wealth planning.
Each level imparts a particular skill set: Level I focuses on investment tools and the foundations of the business, giving candidates the necessary knowledge and comprehension; Level II covers asset classes including equity investments, fixed income, derivatives and alternative investments, emphasising candidates' ability in application and analysis; and Level III covers portfolio management and wealth planning, requiring candidates to be competent in synthesis and evaluation while making investment decisions.
The Level I exam is offered in June and December, Levels II and III in June only. Candidate surveys show they spend about 300 hours preparing for each exam.
The CFA Institute Board of Governors also takes great care every year with the passing score for each exam to set a consistent standard across years, meaning pass rates and the passing score can change from years to year.
The average pass rates across all three exams for those who actually sit the examinations (about a quarter of candidates are no shows) have ranged between 40 and 50 per cent over the last few years.
The study time and low pass rates together demonstrate that any person who has passed all three exams has made a substantial commitment to their involvement in the investment profession.
CFA candidates who have successfully completed the three examinations do not become CFA Charterholders until they have completed four years of acceptable work experience, which cannot include part-time or internship positions.
Most of this work experience must be in evaluating or applying financial, economic and/or statistical data as part of an investment decision-making process. It also includes roles supervising those who have carried out or taught such activities.
Obtaining the CFA Charterholder designation is clearly a challenging route to authorisation under the new financial adviser regime in New Zealand.
The investment professionals who are able to do so have achieved one of the highest standards in the industry and have skills that deserve the confidence of the investing public.
* Katrina Kruger is president of the CFA Society of New Zealand.
