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The Ready.Set.Retire! Blog

Choosing a Financial Advisor Part 2: What Is a CFA?

Wesley Del Col, CFP

What is A CFA.png 

 Passing the Chartered Financial Analyst (CFA) Designation is really hard! (and we’re happy we have someone with the designation on our side!)

If you were to assemble your dream team to work on any project, one would probably start with an inventory of skills that they’d like to have represented on the team.  In basketball, the 1992 Olympic Dream Team didn’t have all of the same type of players but focused on building a team with complimentary skills and attributes.  Michael Jordan certainly was the focus of the team, but they needed excellent ball handlers and passers (Magic Johnson, John Stockton, and Larry Bird) with great rebounding and shot blockers (Patrick Ewing, David Robinson, Charles Barkley, and Karl Malone) and other scorers.


Looking for a financial advisor? Read this blog on the Top 5 Problems with Financial Advisors and be prepared!.  


In Financial Advisory skills and professional designations, it truly is no different.  Having a high level of competent professionals to surround every client is of upmost importance, so having a team with deep expertise and MBA’s, Certified Financial Planners (CFP®), and the Chartered Financial Analyst (CFA) Designation is how Guidance Point decided to best structure our team for maximum benefit to our clients.  So what is a CFA? We’re glad you asked! 


The Chartered Financial Analyst (CFA) is a professional designation that measures financial analysts in the area of competence and integrity.  The CFA charter designation is given by the CFA Institute and is considered to be the highest distinction in the investment management profession.  It’s been called the “Mount Everest of Finance” and some have even labeled it one of the toughest exams in the world. Currently there are roughly 142,000 charterholders in the world,  even though nearly 190,000 candidates sat for one of the CFA exams in June 2017 and over 100,000 candidates annually have sat for an exam since 2007.


To enroll in the CFA program, you must have a bachelor’s degree and 4 years of qualified, relevant work experience in the investment industry.  The course of study is split into 3 levels and generally takes successful candidates approximately 4 years to complete.  CFA charterholders and candidates have agreed to maintain a high level of integrity and align their behavior with CFA Institute's Code of Ethics and Standards of Professional Conduct.


Level 1 of the program focuses on basic knowledge of ethical and professional standards, quantitative methods, economics, financial reporting and analysis, corporate finance, equity investments, fixed income, derivatives, alternate investments, and portfolio management and wealth planning. Level 2 emphasizes the application of investment tools and concepts with a focus on the valuation of all types of assets. Level 3 of the course of study focuses on synthesizing all of the concepts and analytical methods in a variety of applications for effective portfolio and wealth management.


Candidates must complete each level in succession by passing a 6-hour exam and the exam is offered one time per year (two times for Level 1) – the first Saturday in June.  Successful candidates report studying more than 300 hours for each exam, but in many cases study over 500 hours to pass.  The pass rate for each level ranges from an average of 40% to 58%.  It is a grueling process and requires a significant commitment.


Don’t take our word for it on how difficult this is – try for yourself! Here’s a sample exam question and answer from Level 3 to show the type of examination CFA candidates go through:


Joenia Dantas Case Scenario:

Joenia Dantas is a financial risk manager for Alimentos Serra (AS), a Brazilian manufacturer and exporter of soybean-based food products. AS is a privately held corporation, wholly owned by Cesar Serra. Recently, AS took out a R25,000,000, four-year, floating-rate bank loan requiring semi-annual payments of interest based on SELIC (Banco Central do Brasil’s overnight lending rate) plus a spread of 4.50 percent and repayment of principal at maturity. Serra believes that interest rates will rise in the near future and worries that AS will be unable to absorb the higher loan costs associated with an increase in rates. Dantas tells him that she will convert the loan to a 10.80 percent fixed rate by entering into the pay-fixed side of a four-year, R25,000,000 notional principal interest rate swap with semi-annual payments that exchanges SELIC for a fixed rate of 10.80 percent. She explains that the swap will act as a hedge for the loan, reducing the company’s net cash flow risk and net market value risk. Discussions with Dantas about using interest rate swaps to reduce risk cause Serra to think about the fixed income portion of his personal investment portfolio, which includes R12.0 million in bonds that have a modified duration of 5.50 years. Serra’s beliefs about rising interest rates make him want to reduce the bond portfolio’s modified duration to 2.00 years using interest rate swaps. In order to determine the correct swap position, he needs to learn how to calculate the modified duration of a swap. He asks Dantas how to do this. She explains it to him, using the example described in Exhibit 1.


Exhibit 1 Data for Swap Example

Maturity of swap: 4 years

Payment structure: semiannual

Fixed rate on swap: 10.8%

Duration of 4-year, 10.8% coupon bond: 2.91 years

Serra decides to use a swap that has a modified duration of -2.40 years for the pay-fixed side to reduce his bond portfolio’s duration to the desired level. Dantas knows that AS currently needs to borrow an additional R30,000,000 for 5 years to fund its growth. Brazilian credit markets have tightened and it would cost 17.70 percent per year to borrow this amount locally, but AS can obtain a yen-denominated loan at a fixed rate of 9.50 percent. This would expose it to substantial currency risk. A 5-year currency swap is available in which AS would pay interest in real to the counterparty at 12.20 percent and receive interest in yen from the counterparty at 7.10 percent. The current exchange rate is ¥40/R. In addition to the current needs, in six months AS will enter into a four-year, quarterly payment, R50,000,000 loan to fund local projects. Dantas expects to borrow these funds at a floating rate and convert the loan to fixed using an interest rate swap. She explains to Serra that AS can commit to a fixed rate of 14.3 percent for the future loan by buying a payer swaption today with an exercise rate of 14.3 percent for a four-year swap with quarterly payments and a notional principal amount of R50,000,000.

In order to reduce the duration of his bond portfolio to the desired level, Serra will enter into a pay-fixed swap position with a notional principal closest to:

A. R17.5 million. B. R27.5 million. C. R42.0 million.


Answer: A

“Risk Management Applications of Swap Strategies,” Don M. Chance, CFA 2009 Modular Level III, Volume 5, pp. 447-450 Study Session 15-44-d Determine the notional principal value needed on an interest rate swap to achieve a desired level of duration in a fixed income portfolio. When the current duration (DB), the target duration (DT), and the value (B) of the bond portfolio are known and the duration of the swap has been calculated, the notional principal of the appropriate swap (NP) is found as: NP B . In this case, the notional principal is: 12,000,000 2.00 5.50 17,500,000. 2.40


Due to this level of difficulty, we’re happy to have Ben Smith, CFA  on our team.  Not only because of our appreciation for the level of commitment it takes to earn the CFA charter, but also due to the fact that one  has to be extremely passionate about investing and driven to want to achieve this designation. None of us also never want to know what a swaption is!  This is just one reason why Ben serves as the Chief Investment Officer for Guidance Point and why we’re fortunate to have him on our side.


Are you searching for a financial advisor?  Be prepared!  Know what to look out or, and what questions to ask.



If you enjoyed this blog, check out these

Choosing a Financial Advisor Part 1:  Fiduciary or Broker?

What Happens at a Financial Planning Meeting?

Retirement Versus  College: Where To Save First?


Topics: Families & Individual Investors, Business Owners & Executives, Saving For Retirement, In Retirement, Young Professionals