Financial Risk Manager (FRM®)

An accreditation offered by the Global Association of Risk Professionals (GARP) that certifies the understanding of risk management concepts

A Financial Risk Manager (FRM) is an accreditation offered by the Global Association of Risk Professionals (GARP). It is an internationally recognized accreditation that is considered one of the best designations for a career in risk management.

One incredible advantage of this accreditation is that it is available to professionals worldwide and has a very low barrier to entry. In addition, there are no prerequisites to register for the exam, including education requirements, and the cost of taking the exam is also comparatively low compared to other educational commitments.

Financial Risk Manager - GARP Logo

This certification is considered incredibly difficult to attain. A candidate for this certification must pass two exams with very low historical passing rates and have two years of professional experience within the industry. Further. it is recommended that a candidate studies 200-240 hours for each exam in a self-taught curriculum, making the process very intensive and difficult to complete.

While it is very difficult to attain the FRM accreditation, it makes a successful candidate a valuable addition to a company and sought after by many prestigious firms such as the Bank of China, Deutsche Bank, and UBS.

In many ways, risk is pervasive in the financial industry. A career in risk management involves analyzing, quantifying, and balancing risk to navigate unknowns and make profits in the long run. For this reason, financial risk managers can fill a variety of roles within finance, such as credit risk analyst, operational risk manager, and Chief Risk Officer (CRO). This highly sought-after and competitive designation usually comes with a competitive salary and prestigious job opportunities.

The FRM designation has been evolving for more than a decade, introducing new topics as international standards are updated which ensures the curriculum is always up to industry standards and hence, is valued across the financial industry.

Professional Risk Manager

Financial Risk Management – Different Types of Risk

The process of managing risk is known as risk management, and most professionals in the field of financial risk management have the same goal: to minimize the impact of risks on the company.

Financial Risk Manager (FRM) accreditation requires mastery of different types of financial risks, some of which are briefly explained below:

  • Credit Risk:

Credit risk is the risk a lender assumes when lending money that the debtor may not pay them back. Measuring credit risk consists of analyzing a debtor's credit rating, their collateral against the loan, the loan's terms, their current financial position, and their capacity to repay. A financial risk manager may play a role in determining a debtor's credit risk, what interest rates they should be charged, and whether to provide the loan in the first place, given the circumstances.

  • Market Risk: 

Market risk is the risk of a market crash when buying a security of some kind. Market risk measures the risk of the whole market decreasing in value, which can happen for many reasons. It may be a financial risk manager's responsibility to analyze the volatility in an economy and the likelihood of future market troubles.

  • Operational Risk:

Operational Risk is the term for uncertainty within an organization and the potential for day-to-day operations to not run smoothly, leaving room for uncertainty. It could include poor management, bad PR, underperforming employees, equipment failure, and other internal problems. Measures to address it include creating budgets, projecting earnings, and making important decisions based on company operations. A financial risk manager may want to determine the risk of internal problems at a company so that the business can prepare for them.

Risk vs Reward

  • Inflation risk:

Inflation risk is the potential for inflation to reduce profits or increase losses for a company in real terms. The impact of this risk can be measured by looking at the amount of money circulating in an economy, the velocity of money, and other factors such as interest rates. A financial risk manager may assess the likelihood and quantum of inflation and its effects on a company.

  • Liquidity Risk:

Liquidity risk refers to the risk that a company may not meet its payment obligations due to a lack of liquidity. While a company may have enough assets to pay its debts or meet payments for operations, it may have trouble selling these assets quickly enough to pay them on time; in other words, the company may be illiquid. A financial risk manager may analyze liquidity risk and the risk that a company cannot meet its obligations.

Often, the riskier an investment, the larger the sum of money that could potentially be gained or lost. Risk managers help navigate this risk so that firms don't engage in unnecessary risk. 

Famous investor Warren Buffet has noted that "Risk comes from not knowing what you are doing." While it is impossible to eliminate all uncertainties, a risk manager can help quantify that uncertainty and make more information available to decrease a company's risk.

The Basics of Obtaining the FRM designation

Becoming a financial risk manager takes considerable effort and knowledge and requires the completion of multiple requirements to earn the credential. The most difficult requirement to complete is passing the FRM exam, which consists of two parts. There are no education prerequisites to obtaining the designation.

Studying for Exam

The first part of the exam, offered in May and November, is a 4-hour exam that comprises 100 multiple choice questions and is offered via computer-based testing (CBT).

The first part of the exam is extremely demanding, with GARP recommending a study time of 200-240 hours. The average pass rate for the last 12 years was 46%, with the May 2021 exam having a pass rate of only 43%. The first exam focuses on the tools involved in analyzing financial risk.

The topics found on the first part of the exam is found below:

  • Foundations of risk management
  • Quantitative analysis
  • Financial markets and products
  • Valuation and risk models
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The second part of the exam is equally difficult, with GARP again recommending 200-240 hours of studying to prepare. The exam is offered in May and November and may be taken via CBT. It is a 4-hour exam comprised of 80 multiple choice questions focusing on applying the tools taught in part 1 of the exam. The average pass rate for the last 12 years for the second part of the exam is 57%, with 59% of candidates passing in May 2021.

The exam topics are below:

  • Market risk
  • Credit risk
  • Operational risk and resiliency
  • Treasury and liquidity risk management
  • Risk management and investment management
  • Current issues in financial markets

The passing score for the exam is estimated to be around 70%. It is decided by the FRM committee and is based on percentiles. Those in the top quartile scores receive a score of 1 or excellent, those in the 51-75% percentile receive a score of good or 2, and so on. 

The second part of the exam is not graded until a candidate has passed the first exam. If a candidate takes both exams within the same month yet fails the first exam, the second part will not be graded. A candidate must pass the second part of the exam within four years of passing the first exam.

Computer-based Test (CBT)

Beyond passing the FRM exam, candidates must submit two years of experience in financial risk management. While it is not mandatory, the GARP recommends that certified FRMs receive continuous education of 40 hours every two years to keep up with modern best practices and relevant changes within risk management.

What Do FRMs Do?

A Financial Risk Manager (FRM®) is an accreditation offered by the Global Association of Risk Professionals (GARP) that certifies the understanding of risk management concepts validated by international professional standards. Unfortunately, it is difficult to earn an FRM accreditation, due to which they are highly valued within the financial industry and sought after for many different positions.

Walking on a thin line

People who earn this designation can fill a range of different roles. In many cases, they specialize in specific types of risk, such as the ones described above. Below is a description of some of the roles a financial risk manager may fill.

An operational risk manager works to identify and mitigate the operational risks within a business. Operational risk managers also often play a role in ensuring a company complies with regulatory requirements.

They often fill the role of credit risk analyst. These analysts are extremely common in any operation involving lending money to balance the risk of debtors not paying their obligations.

Credit risk analysts work for banks, credit card companies, investment banks, and rating agencies. This job entails both the creation of credit scores by analyzing a person's financials and credit history as well as making judgments about how much a company should lend to a certain credit level, what percentage of people are unlikely to pay, among many other jobs related to analyzing credit scores and the financial reliability of patrons.

A Chief Risk Officer (CRO) is a very prestigious job that only a few people can land because the position is very competitive. A CRO manages several risks, including ensuring a company operates within compliance with regulation, operational risk, and strategic risk. It may include managing internal audits, fraud investigation, insurance, as well as managing general operational risks.

Financial risk managers are recruited by many prestigious firms, as having the designation makes them a very competitive candidate in risk management. Common employers include the Industrial and Commercial Bank of China (ICBC), Bank of China, Deutsche Bank, UBS, etc. 

Those with the FRM certification can usually earn a substantial salary, with the median pay at $98,000 with top earners able to make $200,000 or more.

Analysing Risk

CFA vs. FRM

The Chartered Financial Analyst (CFA) accreditation is another internationally recognized finance certification acquired by many investment professionals which is offered by the CFA Insititute.

While an FRM certification is considered to be very prestigious in risk management, a CFA charterholder is held in similar regard in the world of investment management and is considered more difficult to attain than an FRM accreditation and slightly more prestigious. 

Obtaining the CFA charter requires 4,000 hours of experience in finance in at least three years, requires a bachelor's degree, and a candidate must pass three different tests. Each of these tests is extremely difficult, and on average passing candidates study over 300 hours for each one, with the third test having the highest pass rate hovering around 55% on average.

The CFA focuses heavily on portfolio management, economics, knowledge of other financial concepts, and a code of ethics constituted by the CFA Institute. The typical salary for a CFA charterholder is well above average, boasting a median base salary of $123,000 and a median total salary of $177,000, which comes with higher fees than the FRM exam and ongoing annual CFA Institute membership fees.

Financial analysis

In comparison, the FRM certification demands fewer requirements to achieve. The FRM exam is built of only two parts instead of three in the CFA curriculum and appears to take less preparation to pass and has slightly higher pass rates. There is no bachelor's degree requirement, and you must submit only two years of work experience rather than three years. An FRM credential is likely to earn you a median salary of $98,000, which is less that that of a CFA charterholder.

To conclude, FRM and CFA certifications focus on different finance areas, and deciding between the two may depend on a person's interests. For example, if a person is infatuated with risk and risk management, the FRM certification is a great choice; however, if they'd rather organize portfolios and understand financial analysis, they may want to become a CFA charter. 

While the CFA boasts a higher salary and more prestige, it is more difficult to achieve, and both accreditations are regarded very highly. In addition, while the fees associated with pursuing a CFA accreditation are higher, both are much less expensive than graduate school.

FRM vs. PRM

A Professional Risk Manager (PRM) is an internationally recognized designation provided by the Professional Risk Managers' International Association (PRMIA). To achieve this designation, a person must complete two multiple choice exams within two years. Previously, the PRM designation required the completion of four exams. Unlike the FRM exam, which does not specify a passing score, to achieve the PRM certification, one must score 60% or above on each exam. In addition, in order to maintain a PRM accreditation, one must submit 20 Continued Risk Learning (CRL) credits annually.

Risk Avoidance

To be eligible to take the exams, a person must hold a PRMIA Sustaining or RIM membership. A person must also either have a graduate degree, be a CFA charterholder, have a bachelor's degree with two years of work experience, or have four years of work experience. If a candidate is a CFA charterholder, they are exempt from taking the first exam and may only take the second.

The FRM accreditation is different in several ways from the PRM designation. The exams for the FRM are considered more difficult and have lower pass rates and higher estimated passing scores than the PRM exams. In addition, PRM holders must continue to certify their knowledge annually to retain membership, while FRM holders do not have any similar requirements after acquiring the accreditation. 

There are also fewer requirements to be eligible for the FRM certification than the PRM certification. While similarly focused on risk, the PRM program is more quantitative focused. Those who hold the accreditation usually take on certain roles more frequently than CFA accredited individuals, such as Predictive Analyst and Investment Risk Manager.

In conclusion, the FRM accreditation is considered a more competitive program and more prestigious than the PRM certification. While estimates vary, FRM holders are likely paid greater salaries than PRM holders.

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Patrick Curtis is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis. He has experience in investment banking at Rothschild and private equity at Tailwind Capital along with an MBA from the Wharton School of Business. He is also the founder and current CEO of Wall Street Oasis This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors.