Guest Viewpoint: Keith Ambachtsheer

Few would argue with the CFA Institute’s claim that its chartered financial analyst credential is the most respected and recognised investment management designation in the world. Recently, as a member of the CFA Institute’s Future of Finance Advisory Council, I asked how curriculum material for the CFA credential was assembled and updated, and more specifically, how future-oriented it was. The Institute’s response was creative. 

A few weeks after I posed the question, a 50-pound Fedex package arrived on my doorstep with all 18 volumes containing the 2017 version of the reading material for the levels I, II, and III CFA examinations. I took the Institute’s response as an invitation to answer my own question.

A simple test was to calculate the average age of the reference articles cited in the various chapters of the material. Based on a reasonable sample, this turned out to be in the 20-year area. This suggests the CFA curriculum may be more history than future-oriented.

Why this historical orientation? The course material preamble makes it clear that the ‘Candidate Body of Knowledge’, as currently created and revised, is based on defining a set of ‘core skills’ deduced from generally accepted current theories and practices.

This process raises two questions. First, could it lead to the exclusion of some fundamental building blocks which should be part of the certification process? Second, should the pace at which the curriculum is updated be accelerated?

Taking the answers to both questions to be ‘yes’, the rest of this article shows how the curriculum materials might be impacted in each of the four broad areas that the CFA curriculum covers: ethics and professional standards; the market for investment management services; investment tools; and portfolio management.

The levels I, II, III course materials make it very clear that ethics and professional standards are a critically important element of the CFA certification process. I believe there is something missing in this – a thorough discussion of the ‘asymmetric information’ problem in fair market pricing.

“CFA curriculum material should become more future-oriented and address awkward topics”

This was first set out by the 2001 Nobel Laureate George Akerlof in his classic 1970 article ‘The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism’. If a buyer knows the seller has more information about the product or service than the buyer (eg, whether a used car is a ‘lemon’), that asymmetry should be reflected in the price.

However, if the buyer doesn’t know the seller has more information than the buyer, predictably, the buyer will pay too much for too little value. The retail market for active investment management services is probably the largest asymmetric information market in the world.

Should not this asymmetric information problem be clearly presented in the Ethics and Professional Standards sections of its levels I, II, and III course material? In the assignment section of the course material, should CFA candidates not be asked to solve this problem?

The course material makes it clear there are wholesale and retail markets for investment management services, and that the buy-sides in these markets have different needs. However, it is unclear in the material how CFA candidates should deal with underlying asymmetric information problem.

Turning to the wholesale side of the market for investment management services, users cover the entire knowledge spectrum. Large sophisticated ‘asset owners’ are best placed to create value for stakeholders and society.

Would CFA candidates not benefit from understanding the origins and evolution of these large sophisticated asset-owning fiduciaries, and why they are well-positioned to be net positive value-creators?

The investment tools sections take up the most space in the Levels I and II course material. Quantitative methods are described in detail. At the macro-economic level, various concepts receive thorough treatment. At the micro level, corporate finance is disaggregated into extensive sub-sections. Is anything missing? Again, my answer is ‘yes’.

Effective ‘futures thinking’ means integrative ‘systems thinking’. For example, a new book by Kate Raworth argues we must discard today’s reigning macro and micro economic models. Markets still play an important role in setting prices and allocating resources in her new model. However, ‘systems thinking’ brings a new dimension to the price setting and resources allocation process. If economic activity produces too much carbon, environmental degradation, income and wealth inequality and financial instability, we have an increasingly unsustainable ‘system’. Should the CFA curriculum not expose candidates to this kind of thinking?

The same need for integrative ‘systems thinking’ is required at a more micro level about the role of asset-owning fiduciaries in the oversight and governance of corporate entities. The Network for Sustainable Financial Markets is composing a narrative. A first effort appeared in the November 2017 issue of IPE titled ‘Elephants in the sustainability room’, which shows how perverse incentives, a too-shallow talent pool, and wrong-headed investment policies continue to pose formidable barriers to a more effective, productive, sustainable form of capitalism. Should the CFA curriculum not challenge candidates to understand these system barriers, and to engage in removing them?

The CFA curriculum material covers the full spectrum of portfolio management topics. The consistent tone throughout this material is descriptive rather than prescriptive. This tone, and the ‘datedness’ of the material, means it once again fails to challenge CFA candidates to think critically about a very large, and very old elephant in the room.

John Maynard Keynes offered a graphic description of this in Chapter 12 of his 1936 ‘The General Theory of Employment, Interest, and Money’. There he accused the investment profession of not engaging in the difficult job of transforming savings into wealth-producing capital. Today, as the evidence supporting the value of long-term investing continues to accumulate, short-termism continues to drive too many processes. Should CFA candidates not be challenged to think hard as to why this is so?

What will it take for the CFA credential to continue to be “the most respected and recognised investment management designation in the world”? I believe the answer lies in ensuring that the CFA curriculum material not only becomes more future-oriented, but also addresses awkward topics. I hope this article shows why, and makes a contribution as to how.

Keith Ambachtsheer is a founder of KPA Advisory Services; Director Emeritus, International Centre for Pension Management; and member of the future of finance council, CFA Institute

This article is an abridged version of the December 2017 Ambachtsheer Letter