Thursday, June 21, 2012

Does The CFA Exam Waste A Billion Dollars?

Introduction
The Chartered Financial Analyst (CFA) designation is an achievement that is very difficult and time-consuming to reach. Many companies in the investment industry seek to hire and promote candidates that have achieved a CFA charter. These companies will usually encourage employees to register and take the exams. With the June exam now in the rearview mirror for many people (this author included), it is time to ask, should companies even support their employees taking the CFA exam?

Analysis
The week before this year's exam as I was sitting in a library and noticed many other candidates studying, I thought back to a common press release that is published each year by Challenger, Grey & Christmas Inc that attempts to quantify the lost productivity due March Madness. Following in the footsteps of that article, I will document out the lost time, quantify it and see if the markets show any excess volatility in that period.
The CFA institute reports that successful candidates spend at least 300 hours studying for the exam. Since the pass rate is often below 50% for the exams, this number will be reduced down to 200 hours on a per candidate basis. If you studied less than that and passed the exams, congratulations! If you studied more and still failed, there is always next year.
Looking at the link above, we can see that the number of student taking the exams has risen each year from just over 76,000 in 2002 to over 149,000 for the June 2012 exam. This number includes all registered candidates, so it overstates the number of people that actually took the exam (if you look around on exam day, you will see a good number of empty chairs for level 1 and 2). Assuming the number of candidates sitting for the exam increased by 5% over the previous year, the estimated total for June 2012 is 120,000 people.
The Challenger article cites the average private-sector wage as $23.29 per hour. It is safe to say many candidates in the financial industry dwarf this wage, but candidates in other countries may make less. For the purposes of simplicity, I will round this number to $25 per hour as a wage.
Using the simple math of Average Hours Studied * Number of Candidates * $25 means for 2012, over $600 million of productivity was lost by the CFA exam. If we use the higher estimates for this number, it could easily translate into over a billion dollars of productivity lost to the exam.
Here are some estimates for the past 5 years. Note: I excluded the December test takers from this calculation, so these estimates may understate the effects:
June 2, 2007: 71,897 participants, $359 million
June 7, 2008: 92,081 participants, $460 million
June 6, 2009: 104,116 participants, $520 million
June 5, 2010: 111,731 participants, $558 million
June 4, 2011: 115,027 participants, $575 million

Conclusion
Given the above information, it comes back to the point, should companies still sponsor the CFA charter? The lost time in productivity is staggering. Companies are losing worker hours. The average charter holder will have studied for over 900 hours to pass all three exams. This time could have been spent making business contacts, working more or anything else. Despite all of this, many people (myself included) still believe that the curriculum is beneficial and has enhanced their productivity at work. This is evident in the steadily increasing enrollment to take the exam each year. Congratulations to everyone who studied and sat for the exam. Enjoy these next few weeks before results come out and hopefully the CFA Institute does not add a Level IV to the testing requirements.

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