What a Financial Risk Manager (FRM) Does and How to Become One

What is the Role of a Financial Risk Manager (FRM)?

The Global Association of Risk Professionals has awarded the Financial Risk Manager (FRM) professional qualification (GARP).  

The GARP FRM accreditation is widely regarded as the gold standard for financial risk professionals working in financial markets. Candidates must pass two tough exams and work in the risk management industry for two years to receive the FRM certification.

FRMs often work for major banks, insurance companies, accountancy firms, regulatory agencies, and asset management organizations and have specific understanding in risk assessment.

Understanding Financial Risk Managers (FRMs)

An FRM identifies threats to assets, earning capacity, or the success of an organization. FRMs may work in financial services, banking, loan origination, trading, or marketing. Many specialize in areas like credit or market risk. FRMs determine risk by analyzing financial markets and the global environment to predict changes or trends. It is also the FRM's role to develop strategies to counteract the effects of potential risks.

Important: Financial risk managers (FRMs) are required to be accredited by the Global Association of Risk Professionals (GARP).

The Financial Risk Manager (FRM) Program

The FRM exam covers the application of risk management tools and techniques to the investment management process. To receive the FRM designation, candidates must successfully complete a comprehensive, two-part exam and complete two years of work experience in financial risk management.

Professionals who hold the FRM designation can participate in optional continued professional development. The FRM program follows the major strategic disciplines of risk management: market risk, credit risk, operational risk, and investment management. The exam is recognized in over 90 countries and is designed to measure a financial risk manager's ability to manage risk in a global environment.

The questions are practical and related to real-world work experiences. Candidates are expected to understand risk management concepts and approaches as they would apply to a risk manager's day-to-day activities.

Part 1 of the FRM exam is 100 questions that focus on the following four topics (weight as such):

• Foundations of risk management (20%)
• Quantitative analysis (20%)
• Financial markets and products (30%)
• Valuation and risk models (30%)

Part 2 of the exam consists of 80 questions from the following topics (weighted as follows):

• Market risk measurement and management (20%)
• Credit risk measurement and management (20%)
• Operational risk and resiliency (20%)
• Liquidity and treasury risk measurement and management (15%)
• Risk management and investment management (15%)
• Current issues in financial markets (10%)

Industry Outlook for Financial Risk Managers (FRMs)

In 2018, the median pay for financial managers including FRMs was $127,990 per year, according to the U.S. Bureau of Labor Statistics.

Employment of FRMs is expected to grow much quicker than the average for all occupations at 16% from 2018 to 2028. The Bureau states that "the core functions of financial managers, including risk management and cash management, are expected to be in high demand over the next decade."

Naturally, the vast majority of FRMs are employed in the financial services industry. But the demand for good risk management teams is high in all areas of the economy; from healthcare and engineering to technology and natural resources.

According to GARP, these are the top 10 companies employing the most FRMs:

• ICBC
• Bank of China
• HSBC
• Agricultural Bank of China
• Citigroup
• KPMG
• Deutsche Bank
• Credit Suisse
• UBS
• PwC

FRM vs. CFA

The Chartered Financial Analyst (CFA) designation is one of the most recognized financial designations in the world. Where FRM is considered the "gold standard" of financial risk managers, the CFA has the same level of reputation among financial analysts. Since both the CFA and FRM seek to certify professionals in the financial industry, they're often compared with one another.

The basic difference between the two is this: FRM is a more specialized designation than the CFA Charter. The CFA covers a wide range of topics related primarily to investment management, including financial analysis, corporate finance, equities, bonds, derivatives, and portfolio management. The FRM, on the other hand, focuses primarily on managing exposure to a variety of risks including operational risk, credit risk, market risk, and liquidity risk. The FRM and CFA also have different requirements.

To earn your FRM certification, you must:

• Pass both Part 1 and Part 2 of the FRM exams
• Have two years worth of professional financial risk experience

To earn your CFA Charter, you must:

• Have a bachelor's degree (or be in the final year of your bachelor's program) in order to start the CFA Program
• Pass Level 1, Level 2, and Level 3 of the CFA exams
• Become a member of the CFA Institute
• Have 4,000 hours worth of experience in an investment-related role

Advantages of the FRM Designation

There are several advantages to earning the FRM certification. First, there is the reputational aspect that comes with the program. It is widely regarded as the risk management industry's leading designation. Thus, it is a strong indication of ability and experience within the field. In other words, the FRM carries significant weight with employers and colleagues. Given how rapidly financial markets are changing, the demand for risk management experts will likely only grow over time.

The second benefit is the obvious educational one. As mentioned earlier, the FRM certification provides professionals with a thorough understanding of risk management. In practical terms, that means knowing how to anticipate, respond, and adapt to critical risks.

The Bottom Line

FRM is the leading professional certification for risk managers and widely recognized as the global standard for financial risk. The current demand for expert financial risk managers is high and should only continue to grow over time.

While the CFA is generally regarded as more prestigious and tougher to attain, FRM's big advantage lies in its highly specialized focus on risk. For professionals looking to differentiate themselves, boost job prospects, and command better pay specifically within the risk management field, the FRM is second to none.

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