Having recently graduated with my BS in Business Administration, I have just landed my first job in finance working for a large investment firm in my area. They offered, as part of my work package, tuition reimbursement, which would pay for about half 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 was curious as to what the CFA was all about and what it could mean, in dollars and cents, for my career.
It all boils down to a few basic questions: What does it take to become a CFA, how much does it cost, how much study does it take, and am I prepared to do the job or not?
The 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 surveyed CFAs served on the board or as “C” level executives (CEO, CFO, CIO, etc.), in corporations around the world (Source: 2005 Investment Management Compensation Survey conducted by Russell Reynolds Associates.) And 88% said (in the same survey) that getting the CFA letter improved their career opportunities and chances of promotion.
Ann Logue, in her article “Should I Get the CFA?”, which was written by 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 Level I exams, 54 percent passed Level II exams, and 59 percent passed Level III exams Remember, you have three years to take the first exam after registering. You then have seven years to complete the testing process and gain the experience you need to become a CFA.”
The short version is: there are three tests you must pass to acquire the CFA designation. These tests are tough, pass rates range from 40 to 60 percent, but of course you don’t have to face them alone. There are several companies that do business preparing suitable candidates for tests.
Schweser, one of the two CFA test prep providers I chose to survey, charges $881 for each level of study, its test prep program includes online practice tests, CD study resources, flashcards, and teacher advice. There are three tests and one course for each level, so 3 X 881 = $2,643, just for test prep, plus the cost of the test. Stalla, another test prep provider, is slightly more expensive at $1,490 per level (3 X 1,490 = $4,470). The qualities of service of the two seem similar according to the documentation available on the two websites. But neither company provided me with reliable test passing statistics, so it’s impossible to know if the money spent on these study programs is worth it or not.
An advantage of studying for the CFA vs. getting an MBA is that there is little opportunity cost. You can continue to work at your current job (which, hopefully, is in the financial industry) while studying for exams. Just passing the first test would give you enough of a credential to land an investment job, regardless of your background (Takeaway: If you have a bachelor’s degree in basket weaving, this could be your ticket to a job in the financial sector). The costs are minimal compared to the MBA when you add the cost of two years tuition and waive the two years payment while earning the degree.
Enhanced Compensation Potential
The CFA Institute survey cited above of more than 16,000 charter holders showed that around the world, the total pay gap between those who have a charter and those who don’t is substantial, regardless of experience.
Holders of the letter in the United States earn 54 percent more than those without the designation.
They outperform those with an MBA by just 18 percent.
The average American compensation in 2005 was $170,000. For those with 10+ years of experience, it shot up to $240,000.
Charter holders with more than 5 years of experience reported an average US total compensation of $200,000.
By contrast, median earnings levels for Finance MBAs with 5 years in the industry are around $77K (Source: Payscale.com). It should be noted that 46% of CFAs are also MBAs (presumably with a finance major).
Median Canadian compensation in 2005 was approximately $100,762 (in US dollars) and almost $170,000 for those with more than 10 years of experience.
An MBA graduate is open to extensive career opportunities, much broader than a CFA letter holder. But, the MBA is a more expensive course of study than the CFA; taking the CFA Exam preparation classes does not guarantee a passing score on all 3 tests (levels I, II, and III) of the CFA Certification. While it’s possible to bomb into an MBA program, CFA test pass rates are a bit scary—the 2006 pass rate for the Level I test was just 44%, for example. So, if you don’t have a history of graduating at the top of your class… then the CFA probably isn’t on your cards without a serious study habits makeover!
The candidate must remember that while MBA acceptance rates (for the top twenty B schools) may be low, the time spent filling out applications and submitting a small application fee is all that is left out. On the MBA side, it is the business school’s admissions board’s job to select MBA candidates who are likely to make it through the program. There is no such filter (other than ability and willingness to pay) in the test preparation market. Studying for the CFA exams, either independently or with a test preparation company, does not guarantee that you will ever pass the exams.
“You learn as much or more in the CFA program than you do in an MBA program because the exams focus 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 Division. Putnam Investments Equities in Boston. Conrad Herrmann, senior vice president and portfolio manager at Franklin Global Advisers, agrees with Cotner about the value of the CFA program. “It’s one of the metrics we look at,” she said. “It’s not required, but we highly recommend it. It’s a way to make sure all of our analysts are on the same page and 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, the MBA is a hammer. The MBA will have a broader range of business knowledge – “the MBA toolbox”. If you prefer to be a specialist with a rare skill set that is in high demand in a very limited industry, then go for the CFA. But beware of the fact that many people are taking the tests. There is a genuine fear that certification will be “watered down” and that many charter holders will reduce the economic value of the credential in the near future.
The MBA has similar issues but addresses a broader set of skills and is generally the more flexible and versatile of the two business credentials. MBA work in business, all types of business require those skill sets. If an MBA were 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 understanding 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 workforce that is highly sensitive to economic variables and market corrections that often have a negative effect on the number of managers hired or retained in the industry. As far as small businesses are concerned, the CFA is useless (some would say useless), while the MBA has value at all sizes and levels 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, “It’s not a possibility.” The CFA charter produces “first-class analysts,” but an MBA covers business fundamentals relevant to every type of organization, from start-ups to multinational corporations, nonprofits, and government agencies. “An MBA prepares someone to work within an organization when it comes to margins, strategy, mission, marketing, and human resource issues,” he says. “That will always make the MBA a relevant title.” (SOURCE: Emma Johnson, eFinancial Careers, CFA or MBA: Which is Right for You? April 18, 2007)
Included in the calculation of deciding whether or not to pursue an MBA is the added financial burden of leaving the job for a year or two and forgoing your salary for that amount of time. When you add the opportunity cost to the cost of tuition (for the degree), the time in your future job (at the projected pay scale) to break even shifts considerably to the right. The practical economy of such a decision is as variable as the circumstances of each individual candidate. Analyzing variables is what being a business analyst is all about.
I hope I have shared enough information to lead you to do your own research to make your own decision. It is about making decisions, here it is for you to make the one that is right for you and your future.