CFA versus FRM, Part 1: Job Markets
by David Harper, CFA, FRM, CIPM
A question from Walter:
"Mr Harper, I've enjoyed reading your articles on the net. Your article on Contango and Backwardation cleared up something that confused me for some time. I was hoping I may ask your opinion regarding the FRM exam. Is it worth taking over and above the CFA exam? Does it cover a lot of additional material? Kind Regards -" Walter
Walter, thanks for your question. (I'm glad you liked the contango/backwardation article. The difference between "normal backwardation" and "backwardation" is vexing. Here is a another way to look at it: because contango/backwardation refer simply to the slope of a forward curve, you can observe contango or backwardation. But since normal backwardation/contango refer to the relationship between a future price and the expected future spot price, you cannot observe normal contango/backwardation; whether it's true that normal backwardation or normal contango exists is a truth only revealed over time).
CFA versus FRM
I often get this question about the CFA versus the FRM. I don't have a great answer because:
- Individual goals vary (we want different things from our certifications),
- Job markets are diverse. The CFA is helpful if you want to work in equity research or, say, become a distressed debt analyst. The FRM would be more relevant to a risk manager (but the FRM, at the moment, is probably not a prerequisite for any job). For other Financial Services jobs (e.g., consulting, sales, management), these credentials are elements that complement your overall presentation. Like the MBA (which has suffered some commoditization), they don't buy you advancement per se, rather they enhance your portrait.
- It's getting harder to generalize about job markets, even accounting for their diversity. Almost across the board, there is a higher bar on technical skills (e.g., visual basic) or specialized knowledge (e.g., CPA, SOX)
- Please also note that under the financial certification umbrella, you have more and more choices. Each with their own focus. Just two examples. In alternative investments, we now have the Chartered Alternative Investment Analyst. In performance measurement and evaluation, the CFA Institute recently opened a Certificate in Investment Performance Measurement. Certification fragmentation, I suppose, follows naturally from the trend toward skills specialization.
Why do we sit for these financial certification exams?
Both exams make extraordinary demands on your extracurricular time. A professional analyst once told me he hadn't sat for the CFA because it would require "giving up my Spring and my Summer" (that would be, in the case of the CFA, three years or six sacrificed "seasons"). I think he is roughly accurate about both exams. According to the published guidance, the CFA Level I requires a "minimum of 250 hours hours of study."
And while GARP does not, to my knowledge, provide formal timeline guidance for the FRM, I think the average FRM candidate probably needs at least 250 hours of study before the exam. Some can spend less time, but I bet among the majority who fail the FRM, their main regret is they underestimated the amount of preparation time required. But notice one difference already: the CFA is a minimum three year commitment (work experience aside) and the FRM is a one year commitment. Although the FRM is harder than any one CFA Level. I'd say it is about 150% - 175% more difficult than the Level I CFA.
Why sit for these exams? I can think of two reasons:
- To get a better job (or enjoy the prestige of a respected credential)
- To learn (new material, refresh old material)
Walter, if you don't mind, I will divide my answer into two posts. First, about the job market ("is it worth taking...?"). In a second, I'll dissect the exams themselves.
Job market trends
Broadly, I perceive the following general trends concerning job markets in financial services (my perspective is partially informed by Pablo Triana's expert overview in the September/October Risk Review):
- Quant Finance occupies rarified air where the CFA/FRM won't really help you: Surely the headline in recent years is the soaring popularity and importance of Quantitative Finance, or if you like, Financial Engineering (the domain of the "Quants"). This will continue and I seriously doubt the recent subprime fallout, however bad, will put any dent on the demand for this talent. At the top of the skills pyramid, demand for quants will outpace supply for the foreseeable future. But the Quant Finance professional track is a specialized market; you need a Masters in Financial Engineering or a PhD to compete here. (I am not aware that either the CFA or the FRM even help, as much as I'd like to wish otherwise! I consulted for KMV years ago before they were acquired by Moody's and, those Quants were pretty typical in their disdain for anything less than a PhD. They viewed the CFA program as a sort of finance primer, maybe sort of like a nice extracurricular activity.)
- But Basic Quant and General Finance (quantitative talent) are relevant everywhere and more important than ever: Below the speciality level of hard core Quantitative Finance, basic quantitative skills and general finance (e.g., CFA or FRM) are becoming more relevant to all finance jobs. Years ago, when I consulted to asset managers, a typical relationship manager was an old-school salesperson. One prominent advisor to major pension funds quipped to me, "Do you know who gets the pension fund business?...the guy who bought the last cocktail." But this has changed. As the business has gradually institutionalized, the jobs have become more professional (i.e., requiring threshold sets of competencies). Nowadays, the salesperson (relationship manage, account manager) is often financially sophisticated. Often he or she has an MBA or maybe even a CFA.
- The bar has been raised. You now compete with talented hybrids. Students get credentials earlier. And experienced workers add credentials. Many are not satisfied to be mere experts (nobody wants to be an "expert in a silo" where they cannot understand how their expertise connects to the business), they want be facile across disciplines. And, if you think about it, leaders must bridge disciplines. You see more hybrid personalities: people who are expert in one domain and impressively exposed to additional domains. There seems to be everywhere a recognition that all key jobs are, to some degree or another, interdisciplinary. Nowadays, on the supply side, recent MBA graduates are often triple threats: the graduate degree, a "first degree" in a hard science (e.g., math, engineering), and off-path, valuable real-world experience (e.g., product manager).
About the CFA
The CFA was traditionally a credential for the sell-side equity analyst at an investment bank. But its appeal has broadened over the years. It is now typical to see job descriptions for Consultants that "prefer an MBA or a CFA." Or, the following are among the requirements for a Strategist at a major money manager: "1. Bachelors, Masters, or PhD in a quantitative subject (math, statistics, economics, finance); and 2. CFA, Actuarial or similar professional qualification."
In many cases, the CFA has more perceived value that an average Finance MBA (unless the Finance MBA is earned from a globally prestigious school). I sort of view the CFA as the today's Finance MBA. The Finance MBA, in my opinion, has suffered gradual commoditization over the years and is sort of stuck in the middle between two dynamic markets. One, true mathematicians with PhDs or Master's in Financial Engineering are wanted for the Quant jobs. Two, the supply for generalists now includes many streams of qualified, non-MBA candidates (e.g., economists, experienced workers; and my pick for tomorrow's hot job, anthropologist). And firms are more eager to directly recruit exceptionally talented undergraduates, some of whom amass credentials like the CFA seemingly before they've worked much.
Nowadays, an average Finance MBA plays a merely supporting role in a candidate's overall presentation. But the CFA still has glossy sex appeal. On the hiring side, the CFA enjoys a prestige that was, years ago, attached to the Finance MBA. Pretty much everybody knows what the CFA is, and they respect what it signifies about your education.
Organizationally, the CFA Institute is bigger and more mature than GARP; conversely, GARP is growing faster while the CFA has announced it is now entering its second big phase, dubbed the "Membership Era." Translation: we won't be adding new members as rapidly as in the past, so let's focus on our existing members. But the larger size and maturity of the CFA Institute confers the following perqs:
- One of the best job boards on the web (I routinely get requests to post jobs under my account due to the focused audience)
- A voluntary continuing education program that was good even before the CFA recently increased their focus on, and their resource allocation to, continuing education. The CFA Institute has fabulous continuing education resources
- The actual exam is the gold standard of financial certification exams. From soup to nuts, it is truly marvelous. The body of knowledge is carefully undated each year, their authors are typically "the final-word Gurus" in their area (e.g., Fabozzi in Fixed Income), and their reading materials continue to impress me each year. Recently, the readings were bundled into the exam; e.g. a six volume set for Level I. I think this six-volume set for Level I is just about the best, most well-organized introduction to finance that you can find anywhere. If you could take only one finance text on your desert island sabbatical, I think it should be the Level I CFA readings.
About the FRM
As the CFA is traditionally linked to an equity analyst, the FRM traditionally served to credentialize a risk manager at a bank. As proof, consider GARP now starts their advertising with "The FRM is not just for risk professionals in banks." Both organizations (CFA Institute and GARP) are actively seeking to broaden their appeal, and in my view they are both succeeding. But the CFA is further along.
I would say that the job market for an FRM is less concretely defined than the market for a CFA. When I talk to people, almost everybody knows what the CFA is. It continues to surprise me that not everybody knows what the FRM is! And if they don't know what it is, then it follows they don't know how much pain it took to earn it. Further, where it is common to see "Chartered Financial Analyst" as a job preference or job requirement, I cannot remember the last time I saw "FRM preferred or required."
But this is mostly due to the relative youth of the FRM credential. Risk is a hot topic and the FRM has a very bright future. Academic institutions are a rapidly growing FRM constituency. Both the CFA Institute and GARP (who administers the FRM) actively seek to partner with universities. Also, regulatory bodies. Even energy companies. And most recently, insurance companies. (In addition to the original constituencies, commercial banks and central/regulatory banks).
I would say that, against the traditional risk manager job market, the FRM is a solid and valued credential. But some qualifiers:
- Unlike the CFA which has no direct competition, the FRM has direct competition in the Professional Risk Manager (PRM) certification (so you have two choices for a risk designation)
- If you want to be an equity analyst, the CFA might be all you need (I would argue it is a pinnacle designation for many careers). At the moment, the FRM is generally (in my opinion) a complementary sort of credential, not a destination unto itself.
As mentioned before, GARP is growing fast (20-30% per year) so they don't have a continuing education program yet. Their online resources are coming into their own. And, where the CFA Curriculum is a case study in purposeful, well-organized content, the FRM is a bit uneven in areas (e.g., some of the quant readings are stale; operational risk it tough to cover and it shows). These "growing pain" challenges aside, I am partial to the FRM: I think the five competencies (quantitative, market risk, credit risk, operational risk, and investment risk) provide a great blend of both foundation and cutting-edge theory. So, you get exposed to the traditional stuff (e.g., portfolio theory,fixed income) but, at the other end of the spectrum, you get to grapple right along with GARP as they grapple with the definition of a new frontier (what is operational risk, after all?) and as they systemize very timely content (e.g., credit derivatives).
Next post, I'll compare the actual exams...
Comments
David
This is very useful indeed. But a basic doubt remains.
What is the correlation between passing the FRM exam and actual learning per se?
Firstly, I would rate CFA higher, because it attempts to reach a pinnacle in a methodical manner. The FRM is however a bit of Vodoo magic…it is like all trying to acheive all objectives in one go….content is wide, depth is enormous, and the questions are not straightforward.
In such a scenario, a FRM certified candidate may in all probability get through due to a combination of luck, (focus on the right LOs), problem solving ability and most importantly access to superior preparation stuff (e.g. Bionic Turtle). Does it mean that he/she has superior risk knowledge?...
Correspondingly, a candidate who prepares diligently for the exam and is through with the concepts, but fails….due to inability to solve questions under time pressure, or recall concepts in a jiffy…does he/she have relatively less risk skills?....
Jyothi,
Bahrain
Hi Jyothi,
I totally agree with you. I think GARP has work to do. The CFA is clearly a more mature curriculum: passing the CFA exam has a greater “correlation” with proof of knowledge/skills. Especially lately, as the CFA readings (which are stellar) have been bundled, they are more consistent; and this source consistency leads to exam question consistency. I also agree with your (vexing) implication, you can learn a tremendous amount preparing for the FRM and the…still fail. In practice, this seems to imply that FRM preparation is sort of like an Olympic tryout - even maximum preparation buys you something short of confidence in passing. (you have elsewhere made the point that, apparently, they want to keep the bar raised high).
This last exam (2007), unfortunately and frankly, was a low point; I know, having spoke with them this week, that GARP will not repeat some of its mistakes next year (e.g., the linkage between learning outcomes and source readings in 2007 was too loose).
Part of the “problem” stems from a noble intention: GARP actively seeks practioner input wanting to be relevant and current. This, in my opinion, creates a tension. If you are refreshing readings for, say, operational risk *every year* - you are sort of chasing a moving target, and therefore, it is hard to calibrate a consistent level of questions. (That’s the good news, I do believe GARP tries to be right “in the thick” of the advancing theory). But I don’t think wanting timeliness and relevance are sufficient excuses. CFA, in fact, achieve both consistency and timeliness; e.g., I am really impressed with the CFA 2008 Level II course - the accounting is very current, they already have incorporated *into the testable* curriculum topics such as the practical implication of the FAS 123R on its anniversary.
If anyone who already took CFA level one exam or who is also studying CFA level one, pls contact me as I am preparing for CFA level exam.
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fine,I have got some knowledge about FRM and CFA, since I am CFA from ICFAI (India), Mr. David Harper gave very good valueable ideas,
Thanks
sunil
icfai cfa is not cfa, so really, this forum does not talk about it.
I am working in global portfolio management team at HSBC. I have almost one and a half year of analytics background but I don;t have any financial background and would definitely like to have one. Could you please advise me if CFA would be a good option for me ? I am just and IT engineer as of now
Is it right that in CFA there is stressful job profile?
Regards,
Ritesh Jain
Hi Harper,
I am a Business Analyst working with a Risk Management and Analytics consulting firm. Presently pursuing CFA from ICFAI University, India.
I am a bit confused, whether I should opt for FRM or CFA (USA)? Since, my current profile is in Risk Mitigation, however, my career interest is in Investment Banking.
Kind Regards,
Angoo
the cfa has value.
the frm, although growing rapidly, fails to convince hiring managers. in fact, when hiring, there is an actual disadvantage from having this quite secondary designation, because if someone is in fact ambitious, they should do the cfa. and for any risk manager, the cfa helps substantially more than the frm.
the frm is a hodge-podge. some of the readings i am familiar with are downright dated and largely irrelevant from a practical risk management perspective. there is no focus in this program and no clarity as to what the relevance is.
Some of the complaints regarding outdated curriculum and the one test format should be solved with the new two level curriculum being developed for the May 2010 sitting.
Hello David,
I am a mechanical engineer from a reputed college in India. I have also cleared the FRM 2008. For the last one year I am working a carbon credit consultant. I am unsure about how to utilize my risk management knowledge in the carbon credit field.
Additionally, I am also appearing for CFA Level 1 in Dec 2009.
Please help me as I am in a confused state about proper utilization of my FRM credentials.
Thanks & regards,
Sumit Mittal
hi harper.
i am an undergraduate in business and am joining UBS IBD. at present i m registered for a course in management accounting. could you please advise me on following things :
1) how well does a management accounting degree align with my goal of becoming an investment banker
2) should i go for CFA or FRM.
3) is an mba necessary to get succeed into investment banking ?
I have completed CA and CS from India. i am not able to understand for which course i should i opt CFA or FRM
Thanks a lot sir ... I have cleared my level 1 (CFA) . Will be appearing Level 2 in JUne ‘10 and after reading ur article will also start FRM from next year. Thanks a ton
hi harper,
i am currently pursuing MBA in finance and seriously looking forward for a career in investment banking. i am appearing for dec 09 cfa level 1. i would like to know if acquiring “both” cfa and frm (planning to give in 2010) would be an advantage to achieve my goal or would you suggest any other certification along with cfa instead of frm.
I have been working as a programmer in a software company in India for the past five years. All my projects were in the Banking and financial Sector (mainly retail banking and credit cards). But I find no growth in my career if I continue to be a programmer. I want to make use of the domain knowledge that I have earned by working in this sector for this many years. I really want a change in career.So one of my friends who is also working in the financial domain told me that I could concentrate on Risk Management. So currently I have started preparing for FRM exam. As a starting point I am taking some domain certification related to risk management that are available in our office intranet. I find the subject quite interesting at the same time very challenging.
At this point I would like to know :
1.As I am a pure techie (software developer)Is it a wise decision to purse FRM at this point in my career?
2.What will be career opportunities that I will get once I clear the FRM.
3.How can I plan a transition (a change of career) from a software programmer to a risk management role? (for what position should I look for in a company as a beginner in Risk management)?
Thanks David, i’m a CFA level 2 candidate (June, 2010) and will take my FRM this November. The material on FRM is difficult to comprehend, even the training institute’s notes that i’ve don’t do justice to it. FRM becomes 20% easier for those who have taken CFA before cause there is just no beginners lesson… it starts right in between.
Hi David….
I really appreciate your analysis of how the CFA fares against the FRM or the MBA…
How bout this ? MBA from a premier institute and an additional CFA in the backing… Is it a good combination for someone who wants to get into Finance, maybe Mergers and Acquisitions…
Kindly comment….
Thanks
Karan Thaker
Hi Harper,
I am 25 and an MBA in Marketing with a healthy inclination towards financial planning consultation. Currently I am working with an insurance firm selling policies.
But my heart lies in becoming a Relationship Manager(Overseas investments) with a major bank. Will you recommend a course and a career path for me?
Warm Regards,
Amit
Hello David,
I am a fresh engineering graduate and i want to take CFA,I need to know few things that :
1_Am I eligible to take CFA L1 exam,is it so that we need some work ex prior taking certification.
2_Since my exposure in fin & economics is negligible but yes being from an engineering background I have enthralled in an analytical approach,how much ease i will be at, in taking this certification.?
I am MBA in marketing working in sales… Should i go for FRM? what is the growth prospect.
I am taking CFA I in june 2010. Please guide me about the preparation.
Hello Frnds…
I m a Reseach Analyst (Commodities n Forex) and my CFA (Indian Version) is almost completed ...
I have maths Backround(an Engineer) n wanna go either for Int.CFA (US) or FRM bt nt both…
Kindly suggest me which Designation (After Er. and Indian CFA) can provide me better edge in further professional lifein d lane of 2-3 yrs…
Plz add some Pros n cons.
Thx in Advance
I am CA . I am interested in KPO or consulting firm relating to capital market. could you please advise me on following things :
1) how well does my selected career.
2) should i go for CFA or FRM.
i am recent finance graduate and i have 1 year work experience, would you advise me to go for a CFA now or wait?
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