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Why Are CFA Pass Rates Declining?
 

300 Hours's picture
O
(Orangutan, 339
 
Points)
 on 8/19/12 at 10:00am
Declining CFA pass rates (credit: xkcd.com0

So June 2012 CFA season is fully over! Congratulations to those who passed, and to those who didn't make it this time - come back fighting and you'll get it in the end!

Every year while waiting for the results, candidates speculate on the pass rate. And every year, most candidates expect it to be lower than the past years.

And for good reason - the pass rates have been declining since... well, since the start, really. There is a general consensus within candidates and charterholders alike that the exams have been getting harder, and that may well be the case. I did some quick & dirty analysis this week & would like to offer an alternative: 

The increase in CFA candidates is a significant factor in declining pass rates.

The CFA Institute publishes on their website all the pass rates for the CFA exams since its inception in June 1963. Here's the data for all 3 levels, presented in graphical glory (I did have this in interactive format, but couldn't get html to work for this blog post. Click on the chart images for interactive chart versions)


As you can clearly see, the pass rates have taken a swing downwards from above 80% in 1963 to 40%-50% today.  

Comparing this with candidate volume, it seems that a possible significant factor is simply that more candidates are participating. Below is the number of candidates that took the exam over the same timeline. (Note: The dip in 2003 for Level I candidates is due to the introduction of the December exam)


Although pass rates have been declining somewhat before that, the large declines in pass rates happen after the early 90's, which coincides with an exponential increase in candidates. So a highly plausible factor is that average candidate quality has been lowered by the increasing interest and candidate volume.

Taking it a step further, below is the scatter chart of candidate numbers to pass rates year by year, and the corresponding R-squared values:


As you can see, there's some good correlation evidence there. Not perfect, but obviously declining pass rates can't be purely down to increasing candidate volume.

So while the increasing difficulty of the exams may well be a factor, it may simply be a function of the large candidate pool and decreasing average performance. I suppose this analysis doesn't necessarily disprove that pass rates are causing the candidate increase - that the CFA Institute may be running a sinister conspiracy to lower the pass rates to encourage multiple retakes - hence increasing the candidate volume... but I doubt it.

What do you think - do you have your own theories & explanations? New harder topics being introduced, policies, marking systems? Post your thoughts & comments below!

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Comments

Sandhurst's picture

As a cynic, I think that the

IB
(King Kong, 1,242
 
Points)
 on 8/13/12 at 9:21pm

As a cynic, I think that the CFA has been erecting a barrier to entry, inflating the value of existing charters.

"There are three ways to make a living in this business: be first, be smarter, or cheat."

Moneyball's picture

I'm just speculating here.

ER
 
Points)
 on 8/13/12 at 10:00pm

I'm just speculating here. The CFA is after all, a business. A business that strives to maximize the bottom line and the competitive advantage of its brand, so I suppose that how they determine how many people pass is dictated by how many people they want to retake it to maximize testing fees, but not enough to make it too hard that no one will continue. They also can't allow too many to pass to dilute the value of the charter to employers, which drive the demand for charterholders. They achieve this equilibrium by raising the bar to pass which based on a relative merit, and not absolute, which I dislike. The lower pass rate clearly isn't because people are getting less smart. Quite the contrary, with a global economy becoming increasingly competitive, people are studying harder to pass.

Moneyball
See my other WSO blog posts

GetOnTop's picture

Yeah I doubt they're just

AM
(Baboon, 132
 
Points)
 on 8/13/12 at 10:07pm

Yeah I doubt they're just trying to increase revenue by making more people retake it. Chances are that they have a target number of charterholders they want worldwide in order to preserve the prestige of it. And they should. The CFA shouldn't be like a college degree where anyone can just float through.

GetOnTop's picture

Moneyball: I'm just

AM
(Baboon, 132
 
Points)
 on 8/13/12 at 10:09pm
Moneyball:

I'm just speculating here. The CFA is after all, a business. A business that strives to maximize the bottom line

CFA Institute is a non-profit organization.

NOPLAT's picture

GetOnTop: Moneyball: I'm

CF
(Monkey, 54
 
Points)
 on 8/13/12 at 10:17pm
GetOnTop:
Moneyball:

I'm just speculating here. The CFA is after all, a business. A business that strives to maximize the bottom line

CFA Institute is a non-profit organization.

so are churches

GetOnTop's picture

Moneyball: They achieve this

AM
(Baboon, 132
 
Points)
 on 8/13/12 at 10:18pm
Moneyball:

They achieve this equilibrium by raising the bar to pass which based on a relative merit, and not absolute, which I dislike.

Ok last post on this for a while. This is certainly a valid opinion, but I disagree with it. If I earn the charter I want it to be a strong signal that I am more intelligent than competing analysts, PMs, whatever. The designation's signaling power decreases when more people have it.

SirTradesaLot's picture

See the movie 'Idiocracy' to

 
Points)
 on 8/13/12 at 10:23pm

See the movie 'Idiocracy' to receive most plausible explanation. I expect passing rates to continue to drop precipitously over time.

Turbo leverage for capital explosion -- BD Capital

My WSO Blog

marcellus_wallace's picture

SirTradesaLot: See the movie

ST
(King Kong, 1,617
 
Points)
 on 8/13/12 at 10:53pm
SirTradesaLot:

See the movie 'Idiocracy' to receive most plausible explanation. I expect passing rates to continue to drop precipitously over time.

Damn, beat me to it. Well said. The overall candidate pool is dumber now, the main people who did the CFA before already had the qualifications to be a charter-holder now most people have no real work experience are the ones taking it.

Neighbor's picture

Probably for the same reason

IB
(King Kong, 1,236
 
Points)
 on 8/13/12 at 10:56pm

Probably for the same reason the AMA constricts the amount of students accepted into medical school each year.

I didn't say it was your fault, I said I was blaming you.

WSOusername's picture

Correct me if I'm wrong, but

 
Points)
 on 8/13/12 at 10:58pm

Correct me if I'm wrong, but isn't the CFA a completely different test today than it was in even the early 2000's... let alone the 1970s? Finance is an evolving field, ergo so too is its curriculum. I'm sure the 1970s test was heavy on derivatives for example (I'm kidding, btw). I mean c'mon guys, 80%+ L1 and L2 pass rates in the 60s and 70s? If that doesn't scream that we're comparing apples and oranges here, I don't know what does. I was actually talking to my friend about this recently, and how if you passed before a certain year you should be forced to retake (or if you refuse, be tagged a pre-(insert year) CFA charterholder).

GBS

huanleshalemei's picture

SirTradesaLot: See the movie

(Gorilla, 519
 
Points)
 on 8/13/12 at 10:59pm
SirTradesaLot:

See the movie 'Idiocracy' to receive most plausible explanation.

Really sad that you say so.

The Auto Show

SirTradesaLot's picture

huanleshalemei: SirTradesaL

 
Points)
 on 8/13/12 at 11:02pm
huanleshalemei:
SirTradesaLot:

See the movie 'Idiocracy' to receive most plausible explanation.

Really sad that you say so.

Why is that? That is the explanation I have for almost everything in life.

Turbo leverage for capital explosion -- BD Capital

My WSO Blog

Cola Coca's picture

I must see this movie - will

O
(Orangutan, 321
 
Points)
 on 8/13/12 at 11:18pm

I must see this movie - will probably feel the same way as SirTradesaLot.

grapefury's picture

I've already passed all 3

(Baboon, 117
 
Points)
 on 8/13/12 at 11:26pm

I've already passed all 3 levels. The argument of increased population leading to lowered pass rates has the most merit at the L1 level. I can agree there. The argument works less at L2 and almost none at L3.

keep in mind survivorship bias. To take L3 means you had to have beaten L1 and L2, which means you are serious AND know how to study well for exams. A group of people 20 years ago that knew how to study well against another group today that can study well shouldn't yield a 80% and 50% pass rate gap. So, the exams either got much harder, or they are lowering the passing % of the population.

I've talking to multiple people who passed L3 decades ago, and they've admitted it was far easier before.

WSOusername's picture

grapefury: I've spoken to

 
Points)
 on 8/14/12 at 12:03am
grapefury:

I've spoken to multiple people who passed L3 decades ago, and they've admitted it was far easier before.

Co-signed. Also the driving force behind my prior post.

GBS

FutureBanker09's picture

The test was completely

AM
 
Points)
 on 8/14/12 at 10:14am
300 Hours's picture

Most of the correlation data

O
(Orangutan, 339
 
Points)
 on 8/14/12 at 10:59am

CFA Blog - 300hours.com | Twitter | Facebook

See my other WSO posts

IRRelevent's picture

Compare it to med school.

PE
(Monkey, 51
 
Points)
 on 8/14/12 at 12:43pm
BeerSaturns's picture

I know a lot of people in

(Monkey, 42
 
Points)
 on 8/14/12 at 3:39pm
analyst1609's picture

Great analysis, very

(Baboon, 156
 
Points)
 on 8/14/12 at 8:47pm

No contract means I have all the power. They want me, but they can't have me. - Don Draper

whatwhatwhat's picture

id imagine there were less IT

HF
(King Kong, 1,409
 
Points)
 on 8/14/12 at 9:47pm
Amphipathic's picture

I wonder if the pass rates

 
Points)
 on 8/19/12 at 12:03pm
WreckEmFinance's picture

Moneyball: I'm just

O
(Baboon, 144
 
Points)
 on 8/19/12 at 7:09pm

"Everything comes to those who hustle while they wait."
-Thomas Edison

Cola Coca's picture

Amphipathic: I wonder if the

O
(Orangutan, 321
 
Points)
 on 8/19/12 at 10:34pm

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