The CFA exam has experienced quite a change since AnalystForum first started in 1999. The number of candidates taking the exam has increased dramatically while the testing format has evolved to accommodate the inflow of new candidates. We've asked a group of experts in CFA exam preparation for their opinions on the state of the CFA program and how recent changes impact CFA candidates. Dr. Andrew Temte, President and CEO of Schweser Study Program, Dr. Thomas Gosnell of E&T NetPubs Review, and the Board of Experts at PASS PRO; all develop test preparation materials for the CFA exam.

Dr. Andrew Temte President & CEO Schweser Study Program

Dr. Thomas Gosnell Managing Editor E&T NetPubs Review

Board of Experts PASS PRO

Team AnalystForum: AIMR has indicated that, beginning this year with Levels II and III, topics may be covered in either essay or item set format. How should candidates prepare for this new policy?

Dr. Temte: It's all about conceptual learning. If the candidate has truly learned the underlying concepts, it shouldn't matter whether the concept is tested as essay or item set. They should be able to apply their knowledge to either exam technology. Unfortunately, we all test differently - some perform better on essay and some better on multiple choice. My gut tells me that AIMR will stick relatively closely to their advertised exam weightings, so this should be somewhat of a moot point. What they're really trying to do is protect themselves by allowing for integrative and innovative questions. A great example would be an equity valuation question that uses the output of linear regression to find the required rate of return on a security to use in the valuation process.

Dr. Gosnell: Candidates should prepare in the same way they have in the past. That is by doing the assigned readings and understanding the inter-relatedness of the material. Levels II and III are very different from Level I. In the Level I exam, questions tend to be very specific to learning outcomes with little integration across the curriculum. Levels II and III have significant amounts of integration across the curriculum. It is very difficult for a prep course provider to predict how AIMR exam writers will integrate that material. I would imagine that as candidates begin to rely more and more on the sample exam questions written by prep course providers, we will see declines in the Level II and III pass rates similar to those we have seen in the Level I.

PASS PRO: A new development for Levels II and III is that AIMR® may cover any topic in either essay or item set format. However, we do expect to see certain topics such as individual and institutional investing (at Level III) and company valuation (Level II) to continue to appear in the essay-type format and others such as financial statements to appear in the item-set format. The key issue now is that Levels II and III candidates must be prepared to solve any question starting with a blank piece of paper rather than picking out the solution from four choices. The essay-type format is not necessarily more difficult, but some candidates struggle with it more than others. To prepare for this format candidate must supplement multiple choice question practice with writing model answers and solving numerical problems without being given the answer. The CFA® exam should NOT be the first time that the candidate values a stock or critiques an investment policy statement.

Team AnalystForum: The 2002 CFA exam had some of the lowest pass rates on record. What do you attribute this to and what is your outlook for pass rates in 2003?

Dr. Temte: There are several things going on here, but I'll just speak to two.

First, AIMR has a real knack for asking bizarre questions on topics that are otherwise reasonably straightforward. I get many post exam comments from candidates who tell me that they thought they knew the material but had "no idea" what AIMR was trying to ask in a particular question. Some of this phenomenon can be attributed to exam-day stress and time pressure. However, there are just too many of these types of comments to explain this away.

Second, there has been a marginalization of the candidate pool within the last 5-7 years. I don't want to appear elitist, but the realist in me sees more candidates coming from weaker educational backgrounds and a broader array of employment classifications. Fighting against the validity of this argument is the fact that each year the curriculum gets a little tougher, so it's extremely difficult to compare the exam/candidate pool combination of 7 years ago with the exam/candidate pool combination of today.

My long-run expectation for CFA pass rates is 50 percent at level 1, 55 percent at level 2, and 60+ percent at level 3. Hence, I expect a slight upward bounce from the abysmally low pass rates of 2002 - but not much.

Dr. Gosnell: I attribute the low pass rates to several factors. First, the last few years have seen the largest growth in enrollments for the Level I exam coming from outside the US. For many of these candidates, English is not a first language. The Level I exam is difficult enough without having to deal with language issues. Second, there has been increasing emphasis in the investment management industry on being a charterholder, or being in the process of attaining the charter, as a condition of employment. I think there are more candidates today who in the past would have self-selected not to take the exam knowing they probably would not be able to pass. They are now being forced into the process. Third, I think that there have been increasing numbers of candidates who have tried to rely solely on prep courses thinking that if they just read the notes and try to answer sample exam questions then they will be prepared. For some candidates, depending upon their background, this approach may be sufficient. Most candidates, though, need to work through at least some of the readings specified in the AIMR study curriculum.

PASS PRO: The steady drop in the pass percentages across all levels is a concern to anyone sitting the CFA® exam this year. There are numerous theories that have been proposed by observers, including the influx of non-English speaking candidates, more inexperienced candidates, and conscious action by AIMR® to raise the passing score etc.

But rather than dwelling upon the reason behind this tread the candidates should focus on their own preparation. Over fifty thousands candidates did pass the exam in 2002 and any candidate who stays focussed and stays motivated has a high chance of passing in 2003.

Team AnalystForum: What is the most common mistake you see candidates making in preparing for the CFA exam?

Dr. Temte: Studying almost exclusively from question banks and old AIMR questions.

For exams like the Series 7 or 63, and many insurance exams, it is relatively easy for a study provider to estimate the structure, style and content of the actual test due to its narrow curriculum focus and the frequency with which the exam is offered. As a result, studying questions can be a relatively effective study method for these types of exams.

Candidates should never expect to see the questions asked in the AIMR sample exams or any study provider's proprietary sample exams on the real test. Hence, the trap that some candidates fall into is one where they primarily study questions from sample exams or test banks and fail to rigorously learn the underlying concepts. In this situation, it is extremely difficult for these candidates to transport their knowledge base to actual exam questions that they have never seen before. Couple this inability to apply rote knowledge of specific questions with the excess stress of exam day and you have a formula for disaster.

Dr. Gosnell: I think that the most common mistake is failure to prepare adequately. Most unsuccessful candidates do not put forth the time and effort required to prepare for the exam. They spend much of their time looking for quick and easy solutions that promise to help them pass instead of learning the material laid out in the curriculum. Some candidates spend their time trying to memorize as many potential exam questions as possible being more concerned about memorizing the correct answers than understanding the questions and why the answers are correct. They may or may not pass depending upon the correspondence between the questions they memorized and the questions on the exam. Again, there is no substitute for learning the material.

PASS PRO: Most candidates sitting for the CFA® exam have been out of university for several years. Hence one of the biggest challenges for such candidates is staying focussed and motivated over the relatively long period of preparation that is required to pass the CFA® exam. The most common mistake candidates make is over confidence – successful analysts think that they know enough about the world of finance. This may be true, but there are lots and lots of concepts in the CFA® curriculum that it is unlikely that anyone can know them all without studying the material.

Another common mistake that candidates make is spending too much time reading study notes and textbooks, and not spending enough time doing question practice. Reading the vast amount of material in notes and books can be motivation-sapping and in any case the candidate is likely to forget much of this knowledge very quickly. Doing question practice breaks the monotony of notes, helps the candidates to put theory into practice and cements the knowledge as it is acquired.

Team AnalystForum: What is the most common characteristic of successful CFA candidates?

Dr. Temte: It's a toss-up between perseverance and self awareness.

Perseverance is an obvious choice due to the sheer volume of material and the Herculean effort that must be put forth by the average candidate. Too many candidates try to take shortcuts and wind up sabotaging their study efforts. With all the pressures of job, family and other social commitments, it is all too easy to put your studies on the back burner only to wake up in early May to the realization that you're not where you need to be to pass.

Self awareness is all about knowing yourself and your limitations. Too many candidates think they need to know everything and spend too much time focusing on the minutiae. Alternatively, they spend way too much effort on concepts that they find difficult and forsake those concepts that are worth just as many points but come much easier. A good example of this is the level 2 candidate who spends two months on derivatives only to find that they didn't put in the requisite effort on easier topics like portfolio theory and equity. It's a terrible thing for a professor to say, but candidates need to remind themselves that they're "shooting for a B" on this exam (you can pass with a "C," but I suggest comfort of the extra cushion). A successful candidate knows when to give up on a question that's giving them trouble and move on to more fertile ground.

Dr. Gosnell: The most common characteristics of successful CFA candidates are focus, perseverance, and a systematic approach to exam preparation. The successful candidate will establish an exam preparation time line early in their study. Maintaining their focus and sticking to their study time line, they will be ready on the day of the exam. A candidate who systematically works through the curriculum, takes the time to understand the Learning Objective Statements (LOS) and diligently answers sample questions based on those LOS will greatly improve their chances of passing the exam. I have seen it work for the students I have mentored though the Level I exam.

I have also seen the other side of the coin. This is the candidate who purchases study notes and sample exam questions. The candidate reads through the notes and makes half-hearted attempts at the test questions. When they take a sample exam and get questions incorrect, they don’t go back to the notes and try again to get the correct answer. Instead they read the solution to the question and assume that if they understand the answer, then they understand the material. Unfortunately, using this approach means that they may not be able to answer a similar question phrased in a slightly different manner.

PASS PRO: There are two types of successful candidates. First, the ones that prepare very hard (300+ hours) and know the CFA® body of knowledge inside out. Second, the ones that put in an average or even below average amount of study time (150+ hours) but are very good at assessing what they already know and zeroing in on the knowledge gaps with a sharp focus on success.

Another key ability of successful candidates is simply test-taking skill. All prep providers and AIMR®, stress the importance of guessing answer that you don’t know and eliminating the improbable choices, etc. But the fact is that the successful candidates are better at playing this game and can often guess even numerical answers without working through the calculations. This ability is partially inherent in the candidate and partially a result of extensive question practice.

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