By: Polux Díaz, María Fernanda Gómez y Renata Herrerías
Last September we talked to Bob Johnson, PhD, CFA, Senior Managing Director, CFA Institute, an organization created in the U.S. with a presence in 58 countries that sets the highest standards of ethics, education and professional excellence in the investment industry. The CFA Institute provides education to investment professionals using its Global Body of Investment Knowledge © (Body Awareness Global Investment Industry), which covers all aspects of the investment profession, including ethics. Today, CFA Institute offers two programs of education and accreditation: the CFA program, which awards the Chartered Financial Analyst © (CFA ©), and Certification Program Investment Performance Measurement, which gives the CIPM ©. Today the Institute has about 100,000 members in over 130 countries, more than 87 percent of them accredited as Chartered Financial Analyst © (CFA ©). Nearly 30 percent of the members are responsible for managing private client assets and 50 percent work in the markets for the next purchase. The CFA Institute is
Bob Johnson earned a Ph.D. in finance from the University of Nebraska, has an MBA in finance from Creighton University and a BS in Business Administration (BSBA) from the University of Nebraska. CFA was accredited in September 1990. Since September 1996, Bob is part of the Institute, first as Vice President in charge of the CFA program curriculum. In December 1998 he was promoted to Senior Vice President. Now Senior Managing Director, CFA Institute and is responsible for the following activities: education, advocacy and strategy development for the Americas, also serves as executive director of the Research Foundation of CFA Institute. The Centre for Financial Market Integrity, CFA also reports directly. Prior to joining CFA Institute, was a professor of finance at Creighton University, president of JBK Capital Management and financial consultant to the law firm of Kutak, Rock & Campbell.
How the CFA Institute built its reputation? How you did you expand this reputation outside the United States to become “The Standard” of the investment analysis profession and the most recognized accreditation around the world?
Bob Johnson meets, that’s a really interesting question. Surprisingly enough, our reputation has been built basically largely through word of mouth. You know we ask our candidates every year, after the examination, a lot of questions. And one of the questions we ask is how they learned about the CFA program, how they first learned about it. 81% of new level I candidates first learned about the program through word of mouth, that’s globally. In LA 89% of new level I candidates first learned about the program through word to mouth. And I think that’s a real testament of how CFA charterholders and CFA Institute members feel about the charter and feel about the organization. Just to give you a little bit of color, we have currently over 102,000 members in over 150 countries. The vast majority of those people, over 90,000, are CFA charterholders. In addition we have 135 local affiliated societies in 58 countries. Ana Cecilia is the president of the local society in Mexico; the CFA society in Mexico and what they do is very important in terms of building our reputation locally. They provide networking and local programming opportunities, and they really serve as one of the most important elements in terms of promoting CFA programs and CFA Institute activities. I would be remiss if I didn’t mention that we also, over the past 10 years, have been the subject of a great deal of positive media attention. In 2005 The Economist did a feature article on us that termed the CFA program “the gold standard”. Recently The Financial Times has referred to us as the industry’s benchmark and a global passport. In the last ten years we have also built terrific relations with regulators around the world and that has helped build our reputation in the financial marketplace. Many regulatory agencies accept earning the CFA charter or passing a certain level of our examinations as a waver to required competency exams. And then, finally, and you are very well aware of this, in 2006 we launched the CFA program partner initiative. The universities in the CFA program partner initiative are the finest universities around the world: Oxford, Cambridge, London Business School, NYU and we are really pleased that ITAM is one of our 128 CFA program partner institutions around the world. That is helping to build our reputation today.
Renata Herrerías comment. It also helps the constant review process of the curricula, how rigorous are the studies, the ethics, all those components that you ask which make very successful professionals?
Bob Johnson meets, oh, absolutely, and I can talk a great deal about how the program is built. It really is a testament to the unique nature of our program that it is one that is developed by working professionals for working professionals, and it is truly global. The CFA program is the same everywhere, so if somebody sits in Mexico City for the CFA exam, they’re sitting for the same examinations that people are sitting for in NY, in London, in Bombay, or any financial setting around the world. The other thing is that they are being judged by the same standard, so that, when somebody sees the letters CFA behind somebody’s name, they know what that means.
In the USA there is a very strong and well organized Association of Financial Analysts, but in Latin America (and in Mexico to be more specific) there is not. On the other hand, the number of CFA members in the region is progressively increasing. Could we see a new Association of Financial Analysts in Mexico (or in Latin-American) under the direction and leadership of the CFA Institute?
Ana Cecilia comment, from my point of view, the CFA society of Mexico has been growing steadily for the past years. For instance, last year we had a growth of 13% in the total members and for the CFA chart holders, it increased in 14%, so this is an indication of how we are increasing our presence in the local market. I agree with you; this is new: financial analysis associations here in Mexico. The CFA society of Mexico began in 2006, from a previous organization which was the SOMAF (Sociedad Mexicana de Analistas Financieros). We changed everything to make it more active, more in the market by people that should have a stronger presence in the local market, banks, regulators, etc. We have had this CFA Society of Mexico since 2006; it has been four years, so we are seeing an increase in the number of members as well as in the number of chartholders, so we hope that we are going to gain a stronger presence in Mexico. This is very beneficial for the local markets because we are trying to raise standards here; we try to bring up awareness of the benefits of these kinds of certifications and of the importance of associations among financial analysts. We tend to cover all kinds of financial institutions such as AFORES, mutual funds, brokerage companies, etc., and we are also trying to get more presence among regulators to awake this awareness a little bit more. But I agree with you; we have a lot to do here, there are a lot of things that must be done in order to get this, but we think we are on the right page to achieve this: more presence of national analysts organized in associations.
Bob Johnson meets, And I want to add too, that from the CFA institute perspective in terms of the global organization, our board of governors recently approved a Latin America plan were by we are devoting more resources to developing our presence in Latin America. We believe that, and I’m sure you know this: we are a global, non profitable association of investment professionals, who are mission driven. Our mission is to raise standards in the financial markets around the world, and we believe that we are underrepresented in Latin America by any metric that you may use. For instance in Latin America we have fewer than 1000 members throughout all the region. That is less than 1% or our members. We have found out that about 1.5% of our candidates are from Latin America. I think one of the reasons why we are relatively underrepresented in Latin America is that we have simply been following demand in terms of where we go to provide resources. And you know, the demand increased very rapidly in the 90’s in Asia and has increased dramatically in Europe. We are making a concerted effort to try and increase our presence in Latin America. So I think you’re going to see lot more resources; we are opening an office in Buenos Aires, in the very near term, and you’ll see CFA Institute’s presence even more and more in Latin America.
Renata Herrerías comment, aAs Latin America markets are smaller than the US market, do you think that efforts to build financial analyst’s associations should be made as a region and not only from a national perspective?
Gabriela comment, well we are growing at some measure. We are growing our presence and are locating resources in order to kind of fulfill this demand from candidates, but with some differences in the countries within the region; we have seen that the members have been demanding more and more to participate, but then, through the society, we really believe that the societies have a lot to do in increasing the awareness in the CFA programs. We will be working with them together jointly in order to achieve the goal of growing this awareness with regulators and employers, and all the society, all the financial professionals within the region.
Bob Johnson meets, I don’t want to make it sound like we haven’t been growing in the region; we certainly have, and let me give you some numbers. In 2010 the CFA candidates in Mexico were up to 22% over 2009, in Chile candidates were up to 39% over 2009, and in Peru they were up to 27% over 2009. You have to remember that we’ve been immersed in a financial crisis, so to see numbers growing like that in a region, during a time period in which you may not expect the numbers to grow, I think gives you and indication of how strong the demand is for the CFA charter in Latin America.
Gabriela Comment, of course, considering the financial professionals within the region, the potential is really fantastic and we are trying to cover all the initiatives that are needed in order to grow that number consistently.
As you know financial markets in Latin America are much less developed, are less efficient, less liquid and, compared to other economies, a very small number of companies consider the capital markets a viable source of funding. In your opinion, which are the key elements that our markets are missing to overcome these limitations? In this sense, which is your opinion about the market efficiency and integration of Latin American markets with the rest of the world? Do you think that the CFA Institute has to develop a new curricula applied exclusively to these kind of markets? What should the CFA Institute do to improve both aspects (efficiency and market integration) in the region?
Bob Johnson meets, specifically to the Mexican market, I will differ to Ana Cecilia, but I do have some comments that reflect how we see the world and all markets. There’s no question that markets around the world are becoming more integrated, more interdependent, and less independent. To compete in today’s global market place, developed as well as developing markets must improve their operating efficiency and their ethical standards. I don’t believe that those of us who live in places where the financial markets are so called developed, necessarily teach the developing markets how to do things because things haven’t necessarily been done so well there; there are systemic problems in the markets, in the developed markets. I think the biggest crisis though facing the global market place today is a crisis of integrity. And what I mean by that is that investors are going to be reluctant to commit funds in the capital markets that they don’t perceive are fair game. Now, the strength of what we offer, the strength of a CFA program, and in fact, the foundation of the CFA program that we founded in 1952, when the program was first developed, is the code of standards; we determine our candidate body of knowledge by doing what we call a global practice analysis process; that is, we convene groups of local investment management practitioners around the world and we ask them what knowledge, skills, and abilities they need to know to do their jobs well. In fact, we are going to be convening one of these panels in Mexico City in the very near future, and Ana Cecilia and I will try to schedule a suitable time for that. We do these panels all over the world. What CFA charterholders study are global best practices, and that really prepares them to operate in a very competitive and increasingly globally integrated investment management environment.
Ana Cecilia comment, we have some comments about how capital markets in Mexico could be more efficient or could be more profound. Mainly I think it has to do with the size of the companies here in Mexico. We don’t have a lot of big companies who would be willingly accessing capital markets. This should be a false perception from these companies, middle size companies of the complexity of plain access to capital markets. They have this false perception, the complexity, difficulties, etc. So I think middle size companies traditionally rely more on commercial loans, approaching banks rather than going to capital markets. Therefore, this is what we should try to overcome, traditionally, what companies seek on funding. Another thing that I would like to say is that there is a general lack of financial education among these companies, so they rely on traditional funding and see capital markets as very complex, very sophisticated, and not for them. So I think that we have to work on this education part in these companies to show them that it is not that difficult to access capital markets. Other things we can comment are about regulatory issues. There have been important changes in regulatory issues. I think we have a sound regulation toward banks, towards risk management in financial intermediaries, but there are still some things to do about regulation.
We have the example of Comercial Mexicana. This could bring a little bit of fear on these companies to go into that sophisticated, difficult, not for them markets. So I think there’s a lot of work we have to do on education, and on to try to show them the benefits of capital markets. In the way that companies access capital markets, the markets are going to be more efficient because there will be more participants in them; of course, this could give way to a new way of funding, a new way of managing these companies, and I think they could gain competitiveness, maybe to access to global markets. The ethical part is also very important, in the way CFA charterholders, working in these companies, are going to bring as well their part of the knowledge they have, their ethical behavior, their sound ethical knowledge, and so they’re going to change the perception of capital markets from inside the companies. Those are the hurdles (ethics, and financial education) that we have to overcome in order to gain a more efficient and a more sophisticated market here in Mexico.
Renata Herrerías comment, so tell me if I’m right, I would see that the role of the CFA can be seen to be of significant contribution to the development of the markets. As more people become certificate, as more people become more ethical, have more global knowledge, can you contribute to make these markets, better markets? Is that the position that CFA is assuming? Do you feel this responsibility contributes to the sound functioning of Mexico, or Latin America, or the world markets
Ana Cecilia comment, certainly! That is the view we have. We are convinced that we have a lot to do in bringing high standards in financial markets, not only for the intermediaries but also for the companies participating in these markets. So we are convinced we have to do the job from inside the companies, going to employers, showing them about all these things, and showing that they have to let go these fears of markets. I mean, we are talking about middle size companies. You don’t have to be a big conglomerate to enter these markets, that’s the main thing we have to teach them, that you can be a middle sized company and you can gain access to markets and you can be more competitive. Indeed, we have a responsibility in this.
Bob Johnson meets, and that’s what we see as our mission in the CFA Institute: it’s raising the standards of markets in both the competence part and the ethical part. There are three critical elements to be a CFA charterholder, and that is that you have the requisite of competency, the second is that you agree to abide by a very stringent code of ethic standards of professional conduct. The third element of been a CFA charterholder is that you can’t receive your CFA charter until you have four years of work experience. We view those three elements all as extremely important and what we are doing is the same thing that’s happening in some Latin American markets is for instance happening in some of the Asian markets and some of the Asian markets may be a little bit ahead of the Latin American markets in some of these aspects, for instance, Singapore. We have a very high penetration rate in terms of the number of financial professionals who are CFA charterholders in Singapore and we feel that we have played an instrumental role in developing those markets in some of the premiere markets around the world.
Many explanations and / or justifications have been formulated to explain the recent global financial crisis, among them, issues regarding risk management practices and incentive schemes which motivated top executives within the organizations to assume highly risky positions in order to gain a short term and personal economic gain. How do personal and professional ethical standards counterbalance or balance out when the system imposes such types of pressures?
Bob Johnson meets, about that question; we really have a lot to say. I think the CFA Institute and the CFA society of Mexico are thinking about the crisis and how we can respond to it, and how we can change things. I really believe that there were three separate crises that combined to create this financial crisis; the first is a crisis of competence: just what we were talking about, there are many financial professionals that operate in securities in markets that they really don’t understand. One of the things that you’ll see in the financial markets is that all the innovation that investment markets have had exceeds the ability of many financial market participants to understand the innovation. One of the things that we all suffer, I think, to some extent, is that people don’t want to admit when they don’t understand something. And I think Warren Buffet, who we all know as one of the premier (market) testers has a great saying, and his saying is that is not how big your circle of competence is; it is that you know its perimeter. And I think that having more financial market professionals earn the CFA designation will help raise competence in the industry and effectively help people expand the perimeter of the knowledge that they have. So the first crisis was a crisis of competence, and you know, people going through the CFA program can help increase competence in the industry. The fact is that it was a crisis of ethics; there are simply some bad actors out there that opportunistically took advantage of investors. The free market, if left unregulated, does lead to abuse. We need strong regulators, we need strong regulations, and we also need the support and funds for those regulators. And those regulators really need to understand the financial market. They have to be trained in investment and not simply trained in the law. Let me give you an example: the SEC in US now is increasingly utilizing the CFA program as a preferred training program to their professional staff, and I as said earlier, financial markets are built on trust; once that trust is eroded, financial markets and then the underlying economies are going to suffer. We need to restore faith in the markets and we need to restore that trust. One of the things about the CFA institute is we do advocacy work with regulators all over the world. Right now we are working with regulators in Europe and regulators in the US in helping shape the regulatory reforms in those two areas. I think having more investment professionals abide by our code of ethics and standards of professional conduct will help raise ethical standards in the industry. The final thing, and it’s actually in your question as you talked about incentive schemes that motivated top executives within the organization; the fact is that people respond to incentives. I did my dissertation work, by the way, on executive compensation there is one truth: people do respond to incentives. There are many perverse incentives in the financial markets that need to be addressed; for example, banks have incentives to originate low income loans, and didn’t necessarily have incentives to originate good low income loans. Home owners in the US have an incentive to take out big mortgages because they get a mortgage interest deduction for income taxes. Executives have incentives to take on excessive risk because they essentially have a call option on the value of the firm; they get paid if their strategies are successful and the firm increases in value but they don’t share in the losses if these excessively risky strategies are ineffective. So all of those things need to be addressed but it isn’t just one crisis. In my opinion, it is a crisis of those three things, a crisis of competence, a crisis of ethics and a crisis of incentives, and I think we have something to offer in all of those areas, with the CFA program and with the advocacy work that we do.
Ana Cecilia comment, I would also like to add, Bob, if I may, that here in Mexico we are having changes in regulatory, concerning the incentives and risk management relations to top executives. It is expected to be implemented in one more month or two at the most. It is focused towards banks and stock broker houses. The main issues of these regulatory changes are that traders should separate incentives or their incentives should be calculated taking into account the risk that they are taking for the institution, and that the incentives of the risk management and control areas must be separated from the global results of the company. So this is a whole new way of seeing incentives, and it is going to impose a lot of changes among banks and stock broker houses in order to comply with these regulatory changes. This is motivated, of course, because these perverse incentives that we have seen in many institutions.
Gabriela comment, this is also true for the rest of Latin America
Renata Herrerías comment, You would agree of course, that the personal and professional ethics standards is what can counterbalance all this pressure of the market, despite of the fact that some of these pressures have to be eliminated, and that we have learned, as Bob said, with the three types of crises, that lot of things have to be changed: those perverse incentives, the ethics, and to restore the confidence. The CFA has a lot of work to do in that sense, to promote that the standards of ethics will counterbalance when new pressures arrive, because we know that a lot of pressures will come ahead. It is the role of the CFA Institute to teach its members how to counterbalance those pressures.
The financial sector has been characterized in the recent past by unprecedented changes: mergers and acquisitions, new and highly sophisticated financial instruments, rising volatility levels and regulatory changes and intervention, amongst others. This environment demands that financial professionals prepare adequately so that they may generate appropriate strategies. From your perspective, what are the new and/or additional knowledge and abilities that a finance professional requires?
Bob Johnson meets, I think that a real strength the CFA has, as I indicated earlier, is the way we develop our body of knowledge by doing this practice analysis, and by asking practicing professionals what knowledge, skills, and abilities they need to know to do their job well. We also ask them what skills they believe are going to become increasingly important in future years and that is how the CFA program body of knowledge evolves. And I can tell you what has happened in the past. We have been doing this practice analysis for about 15 years and in the early days of the practice analysis in 1995, we were told that they believed that risk management will become increasingly important in the future, and of course that has happened. Part of what we do is that we look for what’s on the horizon, what do we need to understand on how the marketplace is working and I think there’s something there that is somewhat a misnomer for some people; some people think that if we put something in the CFA program, that means we advocate that and that is not necessarily the case. What the CFA program is meant to do, is to provide financial professional with the grounding in the topics they need to understand to operate in the financial markets. So for instance, credit derivatives are in the CFA program. Does that mean that we advocate that people increasingly use credit derivatives? No, but what that does mean is that operating in the financial markets, financial professionals have to have increased knowledge of credit derivatives. So if they are presented with those opportunities in their employment they know how to deal with those. We really believe that knowledge is power in the financial markets, and you can come out of the CFA program, as well as be educated in the topics and the body of knowledge, and an individual can come out and can be a momentum investor, they can be fundamental value investors, they can be quantitative investors. Basically, what they were doing is providing grounding and a foundation of base of knowledge; that base of knowledge evolves as the financial market evolves. I earned my charter in 1991 and I can tell you that curriculum in the CFA program is distinctly different in 2011 than it was 20 years ago. But it is that way, because people at the CFA institute decided we think this is important. It’s a reflection about what practitioners around the world told us was important, and that why we think the CFA program holds the place that it does in the investment management business.
Gabriela comment, I would like to add that in this year there will be an exam in December in Mexico, and other places within the region: Buenos Aires, Santiago, and Peru. We are seeing an increasing demand on that regard and this will be the very first year than we will have an exam in December.
Ana Cecilia comment, I would like to add something that has been pointed out. The CFA program and the curricula have changed over the years in order to adequate to the changes we are experiencing. So yes, we saw for instance more emphasis on risk management in order to adequate to the changes we are experiencing. As I see CFA shareholders must have great skills in analysis of economic threads and regulatory issues in order to understand what is going on in the market. For instance, we are foreseeing in the near future Basel III so Mexico is going be very active on this topic, so you don’t have to read Basel III nor to incorporate all Basel III to the curricula in order to understand it; the things and the skills you’re gaining must allow you to understand, to analyze, to criticize and to see the impacts of these new regulatory issues. You are going to gain a sharper mind to see the impact of these regulatory changes in the financial markets.
Bob Johnson meets, Ana Cecilia that’s a terrific way to put things. What I always say, is we can’t possibly put all financial instruments and all the financial innovations in the CFA program. It would take you 10 years to do it and you would be behind by the time you are done. What we do is that we give people the tool kit, the analytical skills to analyze anything that comes down, by innovations, by investment bankers, by changes in regulation and so forth. So I think, really, when you think of the charter financial analysts, because many people who get the CFA charter, they don’t work as an analyst, they work as portfolio managers, they work in investor relations, they don’t work as analysts. I always tell people: the analyst in charge of financial analysis is the skill set, is not the description of the job. What is the skill set of a charter financial analyst, well they can analyze something. They can analyze the security; they can break it down, and come up with some conclusions. That’s what we want to teach people, we want to teach people how to analyze different situations and come forth with a reasonable conclusion and I think that’s the strength of the program.
Renata Herrerías comment, tell me if I’m right, it’s as if you were providing a part of the body of knowledge, very good skills to perform those kind of jobs, like investor relations, CFO, financial analyst or a fund manager.
Bob Johnson meets, The other thing we provide is that people know when they get through the CFA program is that they have been trained in a very rigorous manner and it gives them confidence that they can do those kinds of things. The other things it gives you is a sense of community, one of the really joys of my job is that I get to travel all over the world and work with a lot of really good people, nice people, very confident people, and what we share is that we know we have a shared background. And I know when I’m talking to someone with the CFA charter I know what their baseline of knowledge is. And it really helps; it helps in so many different ways.
It is expected that the evolution of the financial sector within the foreseeable future will be centered or focused around the healthy operation of financial institutions by way of significant regulatory changes. What elements or issues should be considered within the regulatory framework as to not inhibit the growth and development of the financial markets?
That’s a terrific question, and that’s exactly where we need to go. You know the pendulum tends to swing, and the pendulum swung, I believe too far in the free markets, no regulation or low regulatory measures, I think what I would say is the severity of the recent financial crisis highlighted, gaps in both national in the US and global regulatory systems that really need to be addressed. The crisis demonstrated some of the perils of what I call light touch regulation, and we believe that reform offers both more effective regulation and support for the economic prosperity. And I give a couple of examples, in the US we convened an investor working group in 2009 and that group identified systemic risk management as a key to restoring investor confidence. National regulators in the US are tightening the regulatory nets to assert oversight, over all systemically important financial institutions. In the US and the European Union, systemic risk councils are been established and, hopefully, can detect and mitigate these systemic risks before they threaten the entire system. One thing that’s going to have to happen because we are in this global financial environment is that we have to net this national measure together to offer global risk management. That’s what’s going to be essential to restoring invertors’ confidence, and the investor working group also noted, like I said earlier, that regulators must be offered the necessary tools and resources to do their job. Rules without teeth basically just blow bureaucracies. It is much better to have field staff that are paid competitively, that are using modern technology to stand eye to eye with the industry and enforce regulations fairly and consistently. Everybody blames the SEC in the US for the lack of regulation, and certainly there is some culpability there, but they were underfunded and they were undertrained. You couldn’t expect them to keep up with markets. On the other side, the industries were incredibly well funded and incredibly well-trained, so we are going to have governments to allocate more capital to regulators so as to have investors’ interest defended; that’s going to be in everybody’s best interest.
Ana Cecilia comment, I would have to say that for instance in Mexico, I think that we already have a good regulation concerning financial markets, banks, and financial intermediaries as the whole. The people at the regulatory authorities are very concerned, they have told me, about liquidity risk. They are moving towards liquidity risk; a couple of years ago we were concerned about personal risk, and more years ago we were concerned about credit risk or market risk, and etc. So they’re moving towards a tighter regulation, and I think they have to balance between a very tough regulation, which in Mexico was very beneficial, because all banks have a very strong capital adequacy so no bank had problems in the financial crisis, but this tougher regulation must be balanced with the concept if we are here to do business. So if we tight things very much operations are going to be very difficult. I think, for example, that the new regulation toward money laundry that has already been announced by the president this past week is going to be very beneficial. We have to stop this risk and all banks and all financial intermediaries are related to this risk; we’re exposed to this risk. This should be our contribution to try to restrain what is going on in Mexico nowadays. There are associations who are coaching financial regulation like the CFA society of Mexico, and giving them our point of view in these things. The society congregates different professionals in different institutions, so we have a say in things, we bring our comments to this issue, we applaud those regulatory issues that prevent the impact of financial crisis, but we also stress out that there must be a balance, so we are bringing our own opinions on this.
Bob Johnson meets, we are very pleased to be affiliated with your fine university and look forward to working with you in the future.
Ana Cecilia comment, I want to add that ITAM is my alma mater.
Ana Cecilia Reyes Esparza, CFA, FRM
Head Credit and Counterparty Risk Managment
Directora Ejecutiva de Latinoamérica de CFA Institute