Having recently graduated with my BS in Business Management I just got my first job in finance working for a large investment firm in my area. They offered, as part of my job package, tuition re-imbursement, which would pay for about half of the cost of an MBA program. Having done my research on schools and degree programs I have been reading more and more about the CFA, or Chartered Financial Analyst. I became curious to learn just what the CFA was about and what it might mean, in dollars and cents, to my career.
It all brakes down to a few basic questions: What is needed to become a CFA, how much does it cost, how much study does it take and whether or not I am cut out to do the work?
Information available from the CFA Institute tells the story in numbers (I hope you like numbers, if you’re going to be a CFA, or an MBA, you’ll find yourself working with numbers a lot!). 11% of CFA’s surveyed were serving either on the board, or as “C” level executives (CEO, CFO, CIO, etc…), in corporations around the globe (Source: 2005 Investment Management Compensation Survey conducted by Russell Reynolds Associates.)And 88% said (in the same survey) that earning the CFA charter improved their career opportunities and odds for promotion.
Ann Logue, in her article “Should You Get the CFA?”, which was authored for the Paul Merage School of Business at UC Irvine, writes that “According to AIMR (Association for Investment Management and Research), students study on average 250 hours to prepare for each six-hour exam. In 2006, 44 percent passed the Level I exams, 54 percent passed the Level II exams, and 59 percent passed the Level III exams. Remember, you have three years to take the first exam after you register. You then have seven years to complete the testing process and get the experience you need to become a CFA.”
The short version is: there are three tests that you have to pass to acquire the CFA designation. These tests are tough, pass rates hover between 40 and 60 percent, but, of course, you don’t have to face them alone. There are several companies that make a business out of preparing suitable candidates for the tests.
Schweser, one of the two CFA test prep providers that I chose to survey, charges $881 for each study level, their test prep program includes online practice exams, CD study resources, flash cards and faculty advising. There are three tests, and a course for each level, so 3 X 881= $2643, for the test prep alone, plus the cost of testing. Stalla, another test prep provider is slightly more expensive at $1490 for each level (3 X 1490= $4470). The service qualities of the two seem similar based on the documentation available on the two websites. But neither company would provide me reliable test passing statistics so it is impossible to tell if the money spent on these study programs is worth it or not.
One upside to studying for the CFA vs. getting an MBA is that there is little opportunity cost. You can continue to work at your present job (which, hopefully, is in the finance industry) while you study for the tests. Just passing the first test would give you enough of a credential to get an investment job regardless of your background (Take Away: if you have a BS degree in basket weaving this could be your ticket into a financial sector job). The costs are minimal compared to the MBA when you add the cost of two year’s tuition, and foregoing two year’s pay while you attain the degree.
Improved Compensation Potential
CFA Institute’s previously cited survey of more than 16,000 charter holders showed that worldwide the total pay gap between those with a charter and those without it is substantial regardless of experience.
Charter holders in the United States earn 54 percent more than those without the designation.
They out-earn those with an MBA alone by 18 percent.
Median 2005 U.S. compensation was $170,000. For those with 10+ years of experience, it shot up to $240,000.
Charter holders with 5+ years of experience reported median total U.S. compensation of $200,000.
By contrast median income levels for MBA’s in Finance with 5 years in the industry are around $77K (Source: Payscale.com). It should be noted that 46% of CFA’s are also MBA’s (presumably with concentrations in finance).
The Canadian median compensation in 2005 was roughly $100,762 (in U.S. Dollars) and almost $170,000 for those with 10+ years of experience.
An MBA grad is open to broad career opportunities, far broader than a CFA charter holder. But, the MBA is a more expensive course of study than the CFA; taking the prep classes for the CFA Exams does not guarantee a passing grade on the 3 tests (levels I, II and III) of the CFA Certification. While it’s possible to bomb out in an MBA program, the pass rates on the CFA tests are a little scary, the 2006 pass rate for the Level I test was only 44% for example. So if you don’t have a history of graduating towards the top of your class…then the CFA probably isn’t in the cards for you without a serious study habits makeover!
The candidate should remember that while MBA acceptance rates, (for top twenty B schools) may be low, the time spent filling out applications and sending in a small application fee is all that you’re out. On the side of the MBA, it is the job of the business school admissions board to select MBA candidates that are likely to make it though the program. There is no such filter (save the ability and the willingness to pay) in the test prep market. Studying for the CFA tests, whether independently or with a test prep company, doesn’t guarantee you will ever pass the tests.
“You learn as much or more in the CFA program as in an MBA program because the exams are focused on the kinds of things you need to know to be a stock investor,” says C. Beth Cotner, chief investment officer for the Large-Cap Growth Equities division at Putnam Investments in Boston. Conrad Herrmann, a senior vice president and portfolio manager for Franklin Global Advisers agrees with Cotner on the value of the CFA program. “It’s one of the metrics we look at,” he said. “It’s not required, but we strongly encourage it. It’s a way of making sure that all of our analysts are on the same page and that they can discuss things in a common language.”
I have heard experts compare the two credentials with the metaphor: “The MBA is a hole in the ground a foot deep and a mile wide, the CFA is a hole in the ground a foot wide and a mile deep.” If the CFA is a scalpel then the MBA is a hammer. The MBA will have a broader range of business know how: “the MBA Tool Box”. If you would rather be a specialist with a rare skill set that is in high demand in one very narrow industry, then go for the CFA. But beware of the fact that many people are taking the tests. There is a genuine fear of the certification becoming “diluted” with many charter holders lessening the economic value of the credential in the near future.
The MBA has similar problems, but the MBA addresses a wider set of skills, and is overall the more flexible and versatile of the two business credentials. MBA’s work in business, all types of business require those skill sets. If an MBA went on to become a CFA, the CFA would be another tool in the MBA toolbox. If you want to manage people and have a well developed knowledge of business in a more general sense (as well as being employable in industries other than finance) then the MBA is the way to go.
By comparison the CFA is designed to increase a holder’s marketability as an investment manager; a much smaller job pool which is very sensitive to economic variables and market corrections that often have a negative effect on the number of managers being hired or retained in the industry. As far as small business is concerned, the CFA is unusable (some would say useless), while the MBA has value in every size and level of business management.
To those who suggest the CFA is replacing the MBA, Dave Wilson, president and CEO of the Graduate Management Admission Council commented: “Not a chance.” The CFA charter produces “first-class analysts,” but an MBA covers the fundamentals of business relevant to every type of organization, from entrepreneurial start-ups, to multinational corporations, not-for-profits, and government agencies. “An MBA prepares someone to work within an organization as it relates to margins, strategy, mission, marketing and human resource issues,” he says. “That will always make the MBA a relevant degree.” (SOURCE: Emma Johnson, eFinancial Careers, CFA or MBA: Which is right for you? Apr 18 2007)
Contained within the calculus of deciding whether or not to get an MBA is the added financial burden of leaving work for one to two years and foregoing your salary for that amount of time. When you add the opportunity cost to the tuition cost (for the degree), the time in your future job (at the projected pay scale) to reach “break-even” shifts considerably to the right. The practical economics of such a decision are as variable as the circumstances of each individual candidate. Analyzing the variables is what being a business analyst is about.
I hope I’ve shared enough information to lead you towards doing your own research to come to your own decision. It’s all about making choices, here’s to you making the one that’s right for you and your future.
AUTOPOST by BEDEWY VISIT GAHZLY
