In a recent column in Chief Investment Officer (“A Skeptic’s View of Today’s Religion”), Angelo Calvello calls out CFA Institute as “the Church of the Capital Asset Pricing Model,” accusing it of perpetuating groupthink about how markets work and not having “a demonstrable positive impact on the way we invest.”
As a CFA charterholder (one old enough to have a mere four digits in his charter number), you might expect that I would bristle at the characterization. While I think the charges are too sweeping and too focused on CFA Institute alone, I agree with most of what Calvello says about the asset management industry of today.
In fact, I’ve written in a similar vein over the years. I absolutely believe that there is a “paucity of genuine innovation.” When I ask investment professionals to rate their own industry and companies (after all, they are in the business of rating other ones), invariably they assign low marks.
Like Calvello, I “have criticized asset management’s business models, culture, and compensation structures; the academy’s lack of imaginative scholarship; and asset owners’ and managers’ behavioral biases” as key factors in the promise of the investment profession not being fulfilled.
And, as for the teaching of investment notions of the day as doctrine, I gave this advice in one of my Letters to a Young Analyst (in regard to the desirability of different credentials): “If you choose to pursue an MBA or a CFA, remember that they are built upon orthodoxy, by and large, which you need to learn and attack at the same time.”
Later in that book, I added, “We need to remind ourselves that modern finance is a very young discipline. Despite that, it is common to see historical asset class returns presented in a way that presumes them to be sound estimates of the future; asset allocation and risk management techniques being made to look scientific; and securities being described, classified, and recommended using relatively few years of evidence as if they were definitive.”
There is so much that we don’t know – and, despite that, the teaching of finance in universities and by CFA Institute and other credentialing organizations is entirely too focused on answers rather than questions. It may not be surprising, then, that the same tack is usually taken when investment professionals talk to asset owners. Narrow perspectives are honed and reinforced; unfortunately, good questions tend to get in the way of pat answers.
One of the best things about the CFA exam process is the need for candidates to study a broad body of investment knowledge in order to pass the tests. However, as with other disciplines, it is easy for a test-taker to perceive that body of knowledge as fixed and foundational, even when it’s not fixed and may only be foundational for a limited period of time.
Soon enough, however, the diversity of the CFA curriculum fades away for most charterholders, at least those that find their way into asset management. Specialists rule, and the mission for most is playing the game of relative performance.
Has it worked for asset owners? Hardly.
Is CFA Institute responsible for the current state of affairs? No, although it’s complicit. In that, it has plenty of company, although it also has a lot more leverage to change the status quo than most of us.
I’m not sure how I would alter the exam process if it was mine to do, other than by stressing the transient nature of the current body of knowledge and the persistent failure of the investment industry to translate the reigning theory into successful practice. I want candidates to learn most everything that they are currently being asked to learn, just not to think of it as scripture.
And it would be nice for there to be a greater focus on the softer skills that matter just as much, from communicating effectively (yes, that means listening as well as speaking/writing), to understanding the broader context of investment decision making, to designing and managing organizations that can meet the real needs of clients. But, should the CFA curriculum be modified in some way to do that? I’m not so sure.
No doubt, we need different kinds of people in the industry, whether they are mathematicians and artists (as Ashby Monk wants to see in a new generation of asset owners) or polymaths (the subject of a previous Calvello column). Training more and more people in the same way isn’t an answer to the current shortcomings. Variant perspectives are required.
Which gets us back to CFA Institute and the tens of thousands of us that have earned our CFA charters.
The organization has always stressed the need for ethical behavior by charterholders, but, despite that emphasis and its Future of Finance initiative, it hasn’t been the force for change in industry behaviors that it should be. As I wrote in a previous posting on this site, CFA Institute “needs to engage and mobilize the large asset owners and asset managers that wield the economic power in the markets.” And change how business is done. That it apparently hasn’t done so to any degree is a greater problem right now than any tendency to cling to a particular theoretical doctrine.
In fact, charterholders are all over the map on many of the concepts that Calvello bemoans. And CFA Institute provides forums in which they are vigorously debated. While I might be an agitator and as skeptical by nature as Calvello, I’m not banned as a heretic. To the contrary, CFA Institute has invited me to share my views in various ways and I’ve had the opportunity to speak to many local CFA societies.
So, while I agree with much of what Calvello has to say, the first priority for CFA Institute should not be to rip up the current body of candidate knowledge. Instead, it should be more aggressive in trying to improve the industry. As with a portfolio manager who becomes a closet indexer to avoid career risk, professional organizations can get too focused on protecting the position they are in rather than advancing the cause.
For CFA Institute, it is time to intensify the battle. It can’t be a bystander and it can’t be thought of as merely a credentialing agency. If that’s all it does, it is providing troops for the industry, not for the profession. That’s the last thing we need.