Are Low CFA Pass Rates Financially Motivated? Here Are 8 Reasons Why We Think Not

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By Christine

Are declining CFA pass rates driven by monetary gain?

The CFA Level I and II pass rates for this year are great, but they used to be a lot higher. In fact, generally after each CFA exam, there will be a general rumbling of dissent on another low pass rate.

An extremely popular theory among candidates is that this is financially motivated. Low pass rates mean that candidates have to take the exam again, resulting in more revenue for the CFA Institute. Right?

Let’s explore this theory and see if it holds water.


Before we begin – the entire team at 300 Hours were also candidates. Heck, some of our guest contributors are still candidates. We’ve failed the CFA exams too, and we know how frustrating it is. 

We’re not taking either side here, just applying reason and logic.

The pass rates since 1963 can be found below:

From an outside view, the CFA Institute can be seen to have an incentive to continue to fail candidates. But this is merely when viewed at surface level; and when you take that train of thought a bit further, several points crop up:

The exams are vastly different across the years

The pass rates, strictly speaking, are actually incomparable as the nature of the exam has varied so much over the years. The first exam in 1963 had only about 300 candidates, and were all seasoned pros. They were all above the age of 45, and 33 of them were above 60. There were no official curriculum books, and the exam was essay-based (real essays rather than the structured answer format we have today).

With such a different exam (and candidate demographic) it really isn’t that easy to conclude that the bar is being unfairly raised.

Drop-off rates

A decrease in pass rate will almost certainly follow with a decrease in take-up rates and increase in drop-off rates. This will actually harm exam fee revenue in the long term, so it’s hard to imagine that lowering CFA pass rates is a key part of CFAI’s revenue strategy.

Increase in variety of candidates

In the recent years, the CFA qualification has seen a lot of participation not just from asset managers, but now traders, investment bankers and even support staff are taking the exam. This will naturally lower the pass rate. The CFA Institute is trying to address this by diversifying the format of the exams, hence their pilot Claritas program aimed at support staff.

Member renewal fees

Remember that CFA Institute continues to collect charter renewal fees – currently about $275 a year, not including local society fees. Although this is much less compared to exam registration, remember that this is at almost no effort or cost to CFA Institute. Thus if we follow the reasoning that CFA Institute modifies their program to maximize profit, CFA Institute should pass as many people as possible, thus converting them into a steady revenue stream without having to worry about setting questions or organizing exams.

Corporate governance

It’s true that CFA Institute makes money from administering exams and distributing material. It’s quite a lot of money at that. CFA Institute however has to report to quite a few regulatory bodies that audit all their processes annually, and these are not just routine checks.
 
CFA Institute Board of Govenors

The minimum passing score (MPS) is ultimately agreed on and approved by the CFA Institute Board of Governors. There are two attributes to note about the Board of Governors:

  • They are a group of independent hardcore investment professionals…
  • …who are not compensated for their work for CFA Institute…
  • …and yet care enough about the importance of this process to volunteer for the job, which between a stressful job and family, is no small commitment.

These are the guys that ultimately decide the pass rate. I’ll admit that it’s not impossible, but it’s just hard to believe that they systematically collaborate to increase CFA Institute’s revenues rather than focusing on doing a good job (which seeing as they volunteered for, they must care about).

Industry scrutiny

The CFA charter is currently seen as the gold standard as far as investment and asset management is concerned. Above all, CFA Institute will regard keeping that status of utmost importance. There are many, many other rival qualifications that would love to take that place, and pass rate manipulation seems like a pretty risky strategy: gambling the incumbent status of the charter for the sake of a few extra percentage points in revenue for a few years.

Our experience with the CFA Institute

I know this isn’t a ‘fact’ per se but rather a subjective observation, but we speak to CFA Institute occasionally and the strict adherence to policy just makes it unbelievable to us that there is a coordinated plan to lower pass rates for financial gain.

We know that as a candidate it’s difficult to assess this objectively. We do think that the opaqueness of CFA results leads to a lot of frustration (hence our Analyze Results section to address this in our own way), but in the end reasoning on a macro level, pass rate manipulation makes little sense when you consider CFA Institute’s other options. 

There are just many, many easier ways for CFA Institute to increase their revenue streams without having to resort to the extremely risky (and heavily scrunitized) behavior of manipulating pass rates. 

Do you really think pass rates are intentionally low to drive up CFA Institute revenue? Air your thoughts below!

Zee Tan
Author: Zee Tan

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