What it means
Financial risk management is the practice of identifying, measuring and controlling the risks a business faces, such as losses from market movements, borrowers failing to repay or internal failures. The FRM qualification is designed to show that a person understands the theory and practice behind this work.
It is held by risk analysts, traders, portfolio managers and compliance staff. The programme has two exams.
The first covers foundations such as the basics of risk, quantitative analysis, financial markets and products, and valuation and risk models. The second covers topics such as market risk, credit risk, operational risk, liquidity risk and investment management.
Candidates must also show professional experience in a relevant field, as the certification is meant to reflect skills used on the job. Once certified, holders are expected to keep their knowledge current through continuing professional development.
The details of fees, schedules and requirements are set by the awarding body and change from time to time. The FRM is different from other finance credentials.
The CFA charter focuses on investment analysis, and accounting qualifications focus on reporting and control, whereas the FRM concentrates on the measurement and management of risk. Many professionals hold more than one.
For employers, FRM-qualified staff help a firm meet the expectations of regulators and boards. Risk functions have grown in importance since the financial crisis, and a recognised qualification gives comfort that staff share a common language and standards.
For non-specialists, it is helpful to know what the letters mean when they appear after a colleague's name. Preparing for the exams takes considerable time, and many candidates study alongside full-time jobs.
Employers sometimes sponsor the fees and give study leave because the knowledge is useful immediately, for example when building a value at risk model or reviewing a loan portfolio.
In practice
Real-world examples.
Example
A bank analyst studies for the FRM while working in the market risk team. After passing both exams and meeting the experience requirement, she is promoted to head of a desk that sets trading limits. Her desk now reviews exposure reports each morning before markets open.
Example
A manufacturing company hires a risk manager with an FRM to build a framework for currency and commodity exposures. The manager recommends a hedging policy and reports to the board each quarter. The board sees clear figures instead of vague assurances.
Example
A fund of funds lists FRM certification among its staff qualifications in a due diligence questionnaire. Prospective investors read it as evidence that the firm takes risk seriously. The firm also publishes its risk policy in the same document.
Case study
Seen in the real world.
Northway Insurance is a fictional insurer that had no formal risk function. After a year of unexpectedly large claims, the board decided to create one. The chief executive wanted staff with recognised qualifications so that the board and regulators could trust the reports.
The company hired a head of risk with an FRM and sponsored two analysts to study for it. In this illustrative scenario, the team built a framework for measuring risk across underwriting, investments and operations, with a monthly dashboard for the board.
Within two years, the dashboard had flagged a concentration in one type of policy before losses emerged. The company reduced its exposure, and the board credited the new function with avoiding a repeat of the earlier year's losses. The chief executive said afterwards that the qualification mattered less than the common language it gave the team, which made discussions with the board far shorter.
Watch out
Common mistakes.
- Assuming the FRM is only for people working in banks, when insurers, funds and corporates also hire FRM holders. Regulators and consultancies value the qualification as well.
- Believing the qualification replaces experience, when work experience is part of the requirement.
- Confusing the FRM with other credentials such as the CFA, which has a different focus. The CFA centres on investment analysis, whereas the FRM centres on measuring and controlling risk.
Questions
People also ask.
What does FRM stand for?
It stands for Financial Risk Manager, a certification awarded by the Global Association of Risk Professionals. It is one of the best-known qualifications for risk professionals worldwide.
How many exams are there?
There are two exams, taken in sequence, and candidates also need to show relevant work experience to be certified. Candidates usually take them in different sittings, with study time in between.
Is the FRM worth getting?
For people planning a career in risk management it is widely respected, although the value depends on the role and employer. It is worth asking prospective employers which qualifications they prefer before committing the time and fees. Many employers list it as preferred or required for senior risk roles.
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