The CFA: 60 Years of Declining Value

How does one explore this topic without offending every financial analyst, CFA or not? I will delicately and objectively attempt. Please read to the end before commenting.

Benjamin Graham, the intellectual grandfather of financial analysis, wrote, "The Financial Analysts as a whole nor the investment funds as a whole can expect to ‘beat the market,’ because in a significant sense they (or you) are the market…"

Coincidentally and ironically, this happened to be published in 1963 in the Financial Analysts Journal.

He continued, "The greater the overall influence of Financial Analysts on investment and speculative decisions the less becomes the mathematical possibility of the overall results being better than the markets.”

So, the first year of testing for the CFA, Graham was declaring the financial analysts' illusory competitive edge in beating the market. You could say he was calling a top and those taking the tests are showing up late to the party. He practically eliminated the raison d'etre at the CFA's inception.

Other than trying to beat the market, there are many areas where knowledgeable financial analysts can be of great value. But clients need to be aware of the many limitations of knowledge that no amount of studying, higher education or credentials can overcome. And they must be wary of the many conflicts financial analysts (advisers, consultants, OCIOs) face when advising for fees while also reporting their own performance.

It's not just me questioning. Check out Jamie Gordon's article on ETFstream.com. The threat to financial analysts and wealth advisors from AI is here. AI is not perfect and never will be. But neither are humans.

1. Supply & Demand

When supply increases the price goes down, ceteris paribus. Similarly, the more financial analysts, CFA or otherwise, competing in the financial markets, the value of each analyst goes down in terms of beating the market and exploiting market inefficiencies. Currently, there are over 167,000 CFAs worldwide making financial markets increasingly more efficient.

Similarly, 60 years ago, an undergraduate degree was not common. Today, it seems everyone has one. After the opportunity cost, explicit costs and sometimes resulting debt, some even argue undergraduate degrees are a negative proposition.

Today, people get master's degrees, doctorates and certifications. This arms race continues with the CFA Institute now offering the CIPM, certificate in ESG investing, and recently a certificate in data science (for the low price of $1,599.) 2002 brought the CAIA certification for alternative investments. The alphabet soup of acronyms after names keeps growing as professionals seek to differentiate despite Graham's prophetic warning truer by the day.

The bella omnium contra omnes of financial analysts working the markets only increases efficiency in the negative-sum game of investing. And technology means they are no longer fighting hand-to-hand with spears and clubs on a local battlefield. It is global, instantaneous and high tech... now with "AI bombs."

2. The Continual Advance of Technology

1963 also saw the first electronic desk calculator. The electronic age was here, and the technological revolution was about to change everything, including financial analysis and investing.

Not only were the means to perform financial analysis improving, but it was becoming commoditized. Founded in 1929, Value Line was a pioneer of bringing analysis to investors. Today, the availability of financial analysis is literally at everyone's fingertips with the internet and smart phones- often for free.

At the end of 1982, the Bloomberg Terminal debuted. No longer were investors and analysts limited to just in-house software, paper reports, hand calculations, and trading by phone. It further commoditized financial analysis and reduced the advantage of formal analytical training, schooling and certifications.

2008 saw the launch of the first robo-adviser. At the end of 2022, we saw the launch of ChatGPT. Just a few weeks ago, JP Morgan announced its entry into AI financial advice. Artificial intelligence will only get better at an exponential rate soon making fundamental financial analysis and advice by humans obsolete. It's just a matter of time.

3. Indexing: The Proof is in the Eating

Index funds emerged in the early 1970s. For the last 50 years they have proven more effective than active management, after fees and risk. In reviewing the 20-year SPIVA report, the authors state, "After adjusting for risk, most active managers underperform most of the time." How many financial analysts, CFA or otherwise, advise these mutual funds that fail to beat the market?

The "60/40" (60% S&P 500 + 40% Bloomberg Barclays Aggregate) has handily beaten most pension plans since its formulation. What unique allocation insights and in-depth manager research are required for two index funds? Since one can eliminate the fee hurdle with zero-fee index funds, that's a tough combination to beat. And to boot, there are no consulting nor custodian fee drags.

Simple, low-cost index funds with a stoic strategic allocation have exposed quixotic, complex, high-fee strategies as inefficient, ineffective and counter to investors' long-term goals. But "complexity sells better." ~Edsger Dyjkstra

Complexity also pays better.

My Master's Degree in Financial Analysis has Declined Too

I expect criticisms of this piece and possibly ad hominem attacks. But do know I have a master's degree in financial analysis. A few of my textbooks were even from the CFA Institute... truly excellent books that I still reference.

I am an objective and realistic observer that can admit the value of my master's degree has declined since I graduated with honors in 2013. Even though it upped my skills and knowledge, I still can't beat the market, time the market, or pick active managers that will outperform over time, after fees and risk.

The CFA Charter Has Value

I made the case there is declining value of the CFA charter due to more supply, advancing technology and indexing. I did not write there is no value.

Is there value in getting a CFA? Of course. It shows you have some understanding of financial markets and the discipline to pass 3 tough tests.

Will it help you beat the market? Probably not. Will it make you a superior asset allocator? Probably not. Will it help you successfully hire and fire active managers to capture net alpha adjusting for risk? Again, probably not. But it will help you get hired in a high-paying industry... likely by a fellow CFA.