The summer exams for the Chartered Financial Analyst qualification are just around the corner, with more than 145,000 participants this year and, as ever, the pass rate is likely to hover below 40%. It takes some 300 hours to successfully navigate the each level of the CFA exam, so it’s notoriously tough to make it through.
But do some candidates shoot themselves in the foot? Tutors and examiners who specialise in the CFA often despair that basic mistakes are made by candidates during the exams, no matter how much training they’ve received. Here, they suggest, are the most common reasons why perfectly capable candidates fail at the CFA.
It may have worked at university to cram and do all-nighters in the weeks prior to the exams, but such tactics don’t hold much water when taking the CFA. 300 hours does not mean a diet of Pro-Plus and energy drinks in the five weeks prior the exam, something a lot of candidates forget, said Tim Robinson, managing director of CFA Institute Americas.
“We recommend 15 hours per week in the five months before the exam, but a lot of people procrastinate until the final weeks, which is the number one reason why they fail,” he said.
Ethics is not simply a way for repentant banks to score points with regulators and the baying public at large. In the CFA, across all three levels, the Ethics module can make up 10-15% of the total. In fact, said Robinson, it’s often used as a “tie-breaker”- if you’re at the margins of a pass, then Ethics is the most common module that will bump you up, he said.
“People think Ethics is easy, or intuitive and often don’t spend enough time on it,” said Priya Mistry, a CFA tutor at Quartic training. “In actual fact, it’s another element of the exam that simply needs committing to memory.”
The Level III CFA exam deviates away from the multiple choice format seen in the other levels and requires candidates to answer essay questions. This does not mean, however, that they’re expecting you to be Wordsworth.
“People worry about the structure and weight of their essay responses, but the examiners are simply looking for a series of bullet points responding to the question,” said Mistry. “Why use two sentences to describe something, when you could use two words?”
What is it about the Financial Statement Analysis and accounting modules of the CFA that makes people struggle so much, particularly at Level I? It’s difficult, argues Robinson, for those with a degree in a financial subject to believe that this module should be particularly challenging, so they often don’t spend enough time studying or miss the point.
“People go into the CFA knowing how to prepare a financial statement, but the exam requires candidates to analyse financial statements and make assumptions about a company. People think because they have a degree in accounting, this will be a simple module for them, but they often fall down on this,” he said.
The CFA requires memorising a large amount of quantitative information, filling your brain to the brim like a glass of water ready to spill out as soon as you see the mention of the relevant equation. It pays, however, to spend some time making sure you have the right information to hand.
“One common mistake is applying the capital asset pricing model (CAPM) to the risk premium. The questions in the exam already deduct the risk premium, but candidates fail to realise this when applying the CAPM equation,” said Mistry. “Similarly, in the dividend discount model, it tends to be that the dividend has just been paid so the time period is zero. If you don’t spend time reading the question you can apply the wrong formula.”
You should, on average, spend one and a half minutes answering each question in the CFA, said Robinson. Most people, however, fail to do this and hand in incomplete exam papers.
“A large number of people still don’t realise the time constraints, or spent up to ten minutes on certain questions, which simply means they don’t complete the exam and diminish their chances of passing,” he said.
"Most people find the questions on study session 4 (Individual investors) the most time-consuming, but the question is usually at the start of the paper, so everyone spends the exam trying to catch up for lost time which is stressful and impairs performance," said Louise Undrill, CFA programme head at BPP. "Why not leave it until the end, or do the questions in reverse order?"
Around 25% of the people who sign up for the June exams simply don’t show up on the day, said Robinson. You’ve got to be in it to win it, right?
“People feel they haven’t prepared adequately, or there are gaps in their knowledge, so decide it’s better to take the exam later when they’re ready. I’d advise people to take it, just to experience the exam.”
It’s basic exam hygiene to know where the test is taking place, how you’re going to get there and to be able to turn up on time, but people still fail to do so, said Robinson. He suggests doing a dry run to the exam hall a couple of days before, just to see how long it takes to get there. Running into the exam hall 20 minutes after it starts is not a good way to get in the right mind-set.