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The CFA Institute has kept track of pass rates dating back to 1963 when there was just a single test for the 284 candidates to take. Only 16 of them failed. You can actually take the very first CFA exam on the CFA Institute’s website to get a sense of how you might have fared. In 2016, 107,591 tests failed. In addition to the massive growth in popularity of the CFA exam, pass rates have clearly declined significantly since the three-test system was implemented in 1964. Since 2008 or so, pass rates for all three tests appear to have stabilized somewhat and even started to wander upwards. Another clear trend from the figure above is the higher pass rates for higher levels. Level III candidates outperform Level II candidates who, in turn, outperform Level I candidates.
*All data on Level I pass rates is an aggregated pass rate for both June and December tests from 2003 to the present.
The chart above examines the spread between the Level II pass rates and Level I pass rates over time (Level II pass rate – Level I pass rate). It was not as easy to tell from Figure 1 or even from the yearly fluctuations in the spread, but there seems to have been a number of interesting shifts between the two levels’ pass rates. By 1973, Level II candidates had averaged a 6% advantage over Level I candidates in the trailing 10 years (including 1973). By 1985, this trailing 10-year average had ballooned to about 13% before plummeting to 2% ten years later. From 1983 through 2004, the difference between Level II pass rates and Level I pass rates averaged just 2.5%. Over the past decade or so, this spread has increased slightly, leveling out around 4-5%. It makes sense that these spreads would compress as overall pass rates declined, but that doesn’t entirely explain the changing pass rates over time. It’s also possible most of the fluctuations are noise with little underlying meaning.
In 2003, the CFA Institute began offering candidates the option of signing up for the Level I exam in December in addition to offering all three Levels in June of each year. Some candidates may still hear that the Level I pass rates in June tend to be significantly higher than pass rates in December. Other than a dramatic outperformance by June test-takers in 2009, there seems to be no clear trend one way or the other.
Furthermore, you may expect the introduction of a second Level I exam to boost the number of Levels I candidates, but this has not been the case either.
The number of Level I tests in 2003 continued to grow at a similar rate as in prior years and actually dropped off significantly in 2004. As expected, high growth in Level I tests tends to bleed into high growth in Level II the following year, and ultimately into Level III two years later. From 2009-2014, growth in Level I exams taken has been relatively flat but has picked up in 2015 and 2016.
To add some color to the historical pass rates, it may be helpful to do a quick recap of how the examination has transformed since its modest beginning in 1963.
The Level III examination in 1963 (the only exam that year) had four questions, including individual portfolio management, valuation of stocks, valuation of bonds, and a choice between a final question on bonds or a final question on stocks.
Ethics was introduced into all three examinations the following year. In 1964, the broad objectives of each exam were similar to the objectives today: Level I tested the analyst’s ability to prepare factual information and Level II required analysts to draw conclusions from the information. More specifically, Level I candidates had to prove an ability to present stock and bond analyses, evaluate management, and successfully perform financial calculations. Level II candidates had to project earnings/dividends, understand capital budgeting and the cost of capital, value stocks, and have a quantitative and qualitative understanding of risk. Level III focused on portfolio management and combining the knowledge acquired in the prior two levels.
Modern Portfolio Theory played a major role (as it does even now) in the Level II and Level III exams in particular as analysts were expected to know how to properly construct a portfolio and how to allocate assets to meet a client’s needs. Through the late 1960s, the ages represented in the candidate pool changed dramatically. In 1965, only 22% of candidates were under 50 years old. By 1969, this figure had increased to 74%. The shifting demographic of CFA exam candidates meant that most candidates had significantly different training and different expectations of the CFA program than the candidates who took the exam just a few years earlier.
In 1969, Level I candidates were first tested on their understanding of how to use computers to aid in financial calculations. In the early 1970s, the CFA’s program Code of Ethics was revised significantly, and quantitative techniques and financial analysis became dedicated topics. Nancy Regan wrote in The Institute of Chartered Financial Analyst: A Twenty-Five Year History that “[by] the mid-1970s, the CFA exam Candidate Program had come to be recognized as the standard of professionalism in the industry.”
When Jay Vawter became chairman of the Council of Examiners in 1978, he sought to ensure that candidates not only had factual knowledge of the key topics but also could apply that knowledge in a practical manner. While this had generally been the objective of the CFA exam since its inception, Vawter’s efforts added continuity to the three levels of the CFA exam. As a result, the Level III exam became even more focused on judgment over memorization.
Beyond the structural changes to the CFA exam over time, the content of the exam had evolved alongside a rapidly growing body of financial knowledge. In 1980, the portfolio management, economics, and fixed-income securities sections were all revamped. At the end of his 1979-1980 ICFA presidency, William Cornish expressed doubt that “Rip Van Winkle, C.F.A., of the Class of 1963, could awaken and pass any examination in 1980.”
As the CFA charter continued to carry more weight in the financial industry and the financial analyst profession expanded, the CFA exam experienced a surge in new candidates through the 1980s. There were so many new candidates each year that the ICFA’s resources were constantly strained throughout the decade. However, the growth in the 1980s paled in comparison to the swell of exams taken through the 1990s.
Throughout much of the 1990s, the total number of CFA examinations taken increased by over 20% per year. As an aside, this rapid annual growth still did not outpace 2008’s gain of nearly 30%. In the early 1990s, the CFA Program curriculum was realigned and a new Body of Knowledge was incorporated into Level I of the program. In 1996, Level I became entirely multiple-choice.
*Category ranges have been adjusted to a total of 100%. Financial Reporting and Corporate Finance have been combined to compare all years. Additionally, Equity Investments, Fixed Income, Derivatives, and Alternative Investments have also been combined into “Asset Classes.”
In the early 2000s, corporate finance became a major topic domain on its own when before it had been grouped with accounting. The accounting topic also evolved during this time period, becoming “financial statement analysis” and then “financial reporting and analysis.” At the beginning of the century, the CFA exam still grouped asset classes together into a single topic with a target weight, but each major asset class was given its own targeting weighting in 2007. The derivatives asset class was also promoted to a major asset class alongside equities, fixed income, and alternative investments.
During the 2000s, the portfolio management topic was expanded to include wealth planning due to the rising popularity of defined contribution plans and the concurrent decline of defined benefit plans. Financial reporting, corporate finance, and quantitative methods were eventually cut entirely from the Level III exam.
Item set questions were introduced into the Level II and Level III exams in 2000. By 2005, the Level II exam was comprised solely of item-set questions. The constructed response (essay) questions in the Level III exam have also evolved to become more specific and less open-ended. The essay questions today are certainly a far cry from the broad equity or fixed-income essay questions of the 1963 exam.
Other notable changes through the 2000s include the Global Investment Performance Standards replacing the AIMR Performance Presentation Standards in 2005, an increased focus on the International Financial Reporting Standards (IFRS), a general shift from specific accounting topics towards financial analysis, expansion of relative valuation techniques, the introduction of fixed-income hedging methodologies, more material on different alternative investments (private equity, commodities, and hedge funds), and the addition of behavioral finance topics.
While the scope of knowledge required of CFA exam candidates has certainly increased over the years, the continuous changes to the exam’s content over more than 50 years may not fully explain the plummeting pass rates. So is there a reason for the decline?
In explaining the decrease in pass rates from 2000-2015, the CFA Institute claims (in The CFA Program: Where Theory Meets Practice) that:
“Falling pass rates reflect the expansion of the candidate pool and related shifts in academic and professional experience, the steady evolution of the CBOK [Candidate Body of Knowledge] supporting the investment management profession, and candidate preparation practices.”
The CFA Institute’s take is that the falling pass rates say more about the candidates than the exams. Certainly, the candidate pool has only continued to expand as the experience level of the average candidate has likely trended downwards (though there’s no hard data to back this assumption). There is no implication from the quote that the exam has become intentionally more difficult. Perhaps the material that candidates must know has become more complex or broader in nature, but the bar is not being set higher purely to push pass rates below a targeted level. This explanation is reasonable as the CFA Institute’s criteria is based on what makes a qualified analyst and not on how many candidates should reasonably be expected to pass each year.
As for the reference to candidate preparation practices, this is fairly uncertain. The June 2015 CFA Program Candidate Survey Report shows a slight increase in hours studied from 2010 to 2015, and that non-CFA Institute preparatory materials (which have likely gained in popularity in recent decades with so much content available online) were among the most effective resources in preparing candidates for their exams. Of course, this mostly serves to shed light on the recent history and doesn’t inform us of long-term shifts in study methodologies.
Some believe that the CFA Institute has made the exams more difficult for its own benefit. After all, more failed candidates in one year probably generates more retakes of the exam the next year. There is an unavoidable conflict of interest in the CFA’s Institute’s model of both selling admission to the exams and also grading them. With that said, there are many people involved in setting the standards for each exam every year so it would seem unlikely that there would be a coordinated effort to hold pass rates artificially low.
Regardless of why the pass rates have fallen in the past, the pass rates have actually stabilized and begun inching up for the last few years. Perhaps the slowing growth in tests taken since the GFC reflects declining interest among “casual” candidates or maybe a larger proportion of unsuccessful candidates are opting out of the program. It will be interesting to continue monitoring the pass rates going forward, and hopefully get some more data-backed insight that seems to be missing currently.
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