How is the CFA Designation Faring?

by Dana on April 16, 2009

CFA-still-relevant During the past year, business education institutions have been dealt some severe blows. Perceived greed, lack of foresight, and general incompetency of many offending CEOs have been traced back to those hallowed halls that minted MBAs.

But business schools and MBAs are not the only source of business training around. Letters behind the names of bankers and investment professionals tell another story. For years, professional organizations have been churning out certified accountants (CA, CMA, CGA) as well as investment professionals. The most prominent and prestigious one has always been the Chartered Financial Analyst (CFA) designation.

This professional designation is known for the breadth of knowledge it offers, its highly challenging curriculum, as well as its strict code of ethics by which it binds its members. The predecessor to the current CFA institute was set up in 1947 to boost the credentials of finance professionals. Nowadays, it sets the gold standard among investment analysis designations.

The rise of banking, wealth management, and hedge fund industries during the last few decades have elevated and subsequently put a premium price on anybody with a CFA designation. In Bill McGinnis’ opinion, a CFA charter can be more important than an MBA degree. As the president of Exponential Careers and a CFA charterholder, he views the successful completion of the program as something highly regarded by employers. If someone has earned the CFA designation and has significant professional experience, many employers may even view a MBA unnecessary.

But with poor performance in the investment industry and massive stumbles of the banking industry, I wondered if a CFA designation’s reputation had been in any way tarnished. A large proportion of the curriculum focuses on derivative pricing, including the valuation of MBS and ABS. One way or another, the mishandling of those complex instruments contributed to the downfall of the banking system. So given the across-the-board failure of most investment advisory firms, rating agencies, hedge funds and wealth managers, are principles espoused by the CFA designation still relevant?

As the gatekeeper and torch-bearer of sound financial analysis, how do CFA charterholders reconcile the flaws in our current understanding of modern finance with principles espoused by the charter?

Michael Kothakota, a level II CFA candidate and the chief investment officer of Wolfbridge Financial, says he doesn’t.

“I never really believed in all of the principles taught by the CFA, but it is a good source of investment knowledge. Our current understanding of modern finance is flawed because most of our theories are based off of models that assume investors are rational. I do have doubts, but we have to start somewhere. I think if someone simply obtains their charter and thinks they know everything, they have a problem.”

Bruce R. Barton, CFA charterholder and principal and wealth manager of Prialta Advisors, agrees.  With an engineering degree under his belt, Mr. Barton was trained to build mathematical models. He saw them as an approximation of how the world works, based on how it had worked in the past.  He concedes that real world problems are too complex to model in full detail, thus the results are hardly perfect.

In his view, “financial theories and mathematical models of markets and securities, like engineers’ models of physical systems, are just that, models. They attempt to reduce the enormous complexity of markets or valuation of particular securities to a compact and understandable form that can be used to make decisions. Financial models have the additional issue in comparison to physical systems that they attempt to model human behavior, which is quite difficult.”

As to adjustments to the curriculum, Mr. Kothakota thinks there’s room for improvement. “I would ask the Institute to begin to look at alternative theories and invite persons who may disagree to discuss changing or at least including some new ideas.”

Mr. Barton says the CFA curriculum represents the best models today, but knowing the limitation of those models is key when applying them.  The way he sees it, the CFA curriculum, while extremely challenging, is still very broad. The level of mathematical modeling involved in pricing mortgage-backed securities and asset-backed securities goes well beyond what is tested in the CFA program.

As for the prestige of the designation, Mr. McGinnis says he has not seen any decline in the value of the charter in the last year. In his opinion, the charter has become an even more valuable credential because it sets the holder apart from the crowd. As a recruiter, he says during boom periods, employers aren’t as selective. But with the contraction on hand, employers are only taking the best of the best.

“CFA charterholders stand out from the crowd. The tighter things get, the stronger your credentials need to be. With approximately 100,000 charterholders worldwide, it is difficult to characterize the positions held by charterholders. Everyone immediately thinks of investment analysts and portfolio managers, but many charterholders have very different positions. For instance, I am an expert witness in securities and investments. Other members work in investment banking, corporate treasury, corporate management, foreign exchange, as investment advisors, as traders, as professors, and in many other positions.”

Mr. Barton agrees.

“From my personal experience, and from what I’ve read recently, the CFA charter continues to be held in high regard. I’m not aware of any taint on the credential. I would think that with all the recent scandals (e.g., Madoff) investors would be more drawn to practitioners that have taken a fiduciary oath as CFA charterholders are required to do.”

For current candidate Mr. Kothakota, he says that although the designation itself has not been tainted, some of the charterholders might have been.

“The problem occurs when people don’t think it changes. For example: Buy and hold strategists. If no one did anything to change how the markets work or invented new financial products or new rules were never created, buy and hold would work. Unfortunately, you are finding people (CFA charterholders) who still espouse that belief – that things will never change. Those who have them, that have contributed to this crisis – well, their reputation now speaks for itself and not that well.”

But Mr. McGinnis’ added that the CFA Institute requires each of its members to sign annual ethics statements. Additionally, the CFA examination process requires a thorough understanding of the CFA Institute Code of Ethics and Standards of Professional Conduct.

Besides, he has a good point: “During times of crisis and uncertainty, both the public and employers look for people they can trust. CFA charterholders commit to the strongest, move comprehensive ethical standards in the industry. This positions them very well.”

Mr. McGinnis’ also stressed the fact that Harry Markopolos – the gentleman who repeatedly contacted the SEC regarding Bernard Madoff prior to the discovery of his Ponzi scheme, is a CFA charterholder.

End of the day, he says that sound bites that generalize the greed of Wall Street is used to stir up, confuse, and oftentimes mislead the public. In fact, majority of business continue to operate profitably and ethically. And problems usually originate from a very few people within the problem companies. When certain segments go bad, it doesn’t mean that “everyone in those companies deserves to have their reputations impugned.”

picture source: ~Moretz

  • Pingback: vbrief.com

  • Pingback: Personal Finance Buzz

  • http://stoppaying.blogspot.com John Feier

    I have my contentions with this…

    “If someone has earned the CFA designation and has significant professional experience, many employers may even view a MBA unnecessary.”

    When I wanted to sit for the CPA exam, the courses which my state accounting board required me to have under my belt before sitting was about one class shy of an MBA. So I was given the choice of dropping out with one class to go before getting an MBA or just getting the MBA. These additional educational requirements were made in the wake of the big accounting scandals that shook the financial world in the earlier part of this decade. Then, in addition to the 150 hour requirement, I needed to take 20 more hours in graduate accounting courses. A lot of MBA programs will not let you take the additional accounting courses until you complete the MBA courses.

    So while it is possible to still be a CPA without getting an MBA, why would you want to if it’s just one more course?

    My question to you is…why shouldn’t the CFA be held to the same standards and requirements?

  • http://stoppaying.blogspot.com John Feier

    I have my contentions with this…

    “If someone has earned the CFA designation and has significant professional experience, many employers may even view a MBA unnecessary.”

    When I wanted to sit for the CPA exam, the courses which my state accounting board required me to have under my belt before sitting was about one class shy of an MBA. So I was given the choice of dropping out with one class to go before getting an MBA or just getting the MBA. These additional educational requirements were made in the wake of the big accounting scandals that shook the financial world in the earlier part of this decade. Then, in addition to the 150 hour requirement, I needed to take 20 more hours in graduate accounting courses. A lot of MBA programs will not let you take the additional accounting courses until you complete the MBA courses.

    So while it is possible to still be a CPA without getting an MBA, why would you want to if it’s just one more course?

    My question to you is…why shouldn’t the CFA be held to the same standards and requirements?

  • http://stoppaying.blogspot.com John Feier

    I’m sorry…that was 12 additional graduate accounting hours, not 20.

  • http://stoppaying.blogspot.com John Feier

    I’m sorry…that was 12 additional graduate accounting hours, not 20.

  • http://investoralist.com Dana

    Hi John,

    Thank you for the comment, although I’m not sure I understand your question. Are you saying there are MBA programs out there that require only one additional course from the CPA program you were partaking? I find that pretty hard to process, since most business educations have a max/min requirement on the mix of classes. So unless all your courses were chosen in the field of accounting, with no IT/finance/strategy/marketing/HR component to it, how is that manageable? That is, if I’m interpreting your comment correctly.

    But as to why you would forgo a MBA for a professional designation: time commitment and flexibility (many professional designations are self-study, while MBAs are still taught in a class setting), cost, quality.

    As to standards and requirements? CFA doesn’t work on a course fulfillment basis as most accounting designations. I had friends in biz school that fulfilled most of their accounting requirements while in school, and only had to take a few more courses outside of school to satisfy the requirements. CFA charter is granted based on the attainment of a bachelor’s degree, examinations, and work experiences. More often than not, these trainings are more rigorous than what one receives in business school. And as accountants, CFA charterholders need to abide by a code of ethics as well. I don’t think MBAs do that just yet.

  • http://investoralist.com Dana

    Hi John,

    Thank you for the comment, although I’m not sure I understand your question. Are you saying there are MBA programs out there that require only one additional course from the CPA program you were partaking? I find that pretty hard to process, since most business educations have a max/min requirement on the mix of classes. So unless all your courses were chosen in the field of accounting, with no IT/finance/strategy/marketing/HR component to it, how is that manageable? That is, if I’m interpreting your comment correctly.

    But as to why you would forgo a MBA for a professional designation: time commitment and flexibility (many professional designations are self-study, while MBAs are still taught in a class setting), cost, quality.

    As to standards and requirements? CFA doesn’t work on a course fulfillment basis as most accounting designations. I had friends in biz school that fulfilled most of their accounting requirements while in school, and only had to take a few more courses outside of school to satisfy the requirements. CFA charter is granted based on the attainment of a bachelor’s degree, examinations, and work experiences. More often than not, these trainings are more rigorous than what one receives in business school. And as accountants, CFA charterholders need to abide by a code of ethics as well. I don’t think MBAs do that just yet.

  • http://stoppaying.blogspot.com John Feier

    Each state varies, but it seems that in most states, the amount of classes that you have to take in order to even SIT for the CPA exam almost fulfill an MBA, in and of itself. In the state of Arizona, it is just one class shy of an MBA. This is why we see a lot of people putting “MBA” next to their “CPA” designations. They figure, “What’s the use? I might as well complete my MBA.”

    I’ve got my MBA, but I don’t have my CPA. I just can’t seem to find the motivation to take the exam anymore, not even in this crappy economy.

  • http://stoppaying.blogspot.com John Feier

    Each state varies, but it seems that in most states, the amount of classes that you have to take in order to even SIT for the CPA exam almost fulfill an MBA, in and of itself. In the state of Arizona, it is just one class shy of an MBA. This is why we see a lot of people putting “MBA” next to their “CPA” designations. They figure, “What’s the use? I might as well complete my MBA.”

    I’ve got my MBA, but I don’t have my CPA. I just can’t seem to find the motivation to take the exam anymore, not even in this crappy economy.

  • http://weakonomics.com The Weakonomist

    Your assumption the other commenter quoted of you was so off base I’m shocked you even said it.

    How can you claim that a CFA with some work exp is the same as an MBA? They are two different things with two different career paths. How many Fortune 500 CEOs are CFAs? Now how many of them are MBAs? Remember not every MBA works on Wall Street.

    I’m sorry if this looks like a personal attack, it’s not. It’s just obvious you’ve bought into the whole media bull-honky about “Wall Street” and “MBAs” and any other media buzzword.

    The CFA is all self-study. The MBA is teamwork and problem solving. Both can be very successful but both only cross paths in maybe 10% of the workforce. Yes CFAs are held to a code of ethics, that’s the whole point of a certification. An MBA is not a certification, it is a representation of additional education, not merely passing three tests.

    I’ve studied for the CFA and have been accepted to b-schools, it’s not unlikely I’ll carry both after my last name a few year down the road. This is especially the case since my career path takes me directly into both, where if you don’t have both you hit a road block in the career.

    I see what you were getting at with this post but you really made a mistake here from overgeneralization and it’s obvious you are either clueless here or simply not involved with the fields.

  • http://weakonomics.com The Weakonomist

    Your assumption the other commenter quoted of you was so off base I’m shocked you even said it.

    How can you claim that a CFA with some work exp is the same as an MBA? They are two different things with two different career paths. How many Fortune 500 CEOs are CFAs? Now how many of them are MBAs? Remember not every MBA works on Wall Street.

    I’m sorry if this looks like a personal attack, it’s not. It’s just obvious you’ve bought into the whole media bull-honky about “Wall Street” and “MBAs” and any other media buzzword.

    The CFA is all self-study. The MBA is teamwork and problem solving. Both can be very successful but both only cross paths in maybe 10% of the workforce. Yes CFAs are held to a code of ethics, that’s the whole point of a certification. An MBA is not a certification, it is a representation of additional education, not merely passing three tests.

    I’ve studied for the CFA and have been accepted to b-schools, it’s not unlikely I’ll carry both after my last name a few year down the road. This is especially the case since my career path takes me directly into both, where if you don’t have both you hit a road block in the career.

    I see what you were getting at with this post but you really made a mistake here from overgeneralization and it’s obvious you are either clueless here or simply not involved with the fields.

  • http://investoralist.com Dana

    John,

    I see your point, these things do differ from place to place. The MBA is much more general, and the CPA will enable you to do much more specific work in your field. Good luck with the choice!

  • http://investoralist.com Dana

    John,

    I see your point, these things do differ from place to place. The MBA is much more general, and the CPA will enable you to do much more specific work in your field. Good luck with the choice!

  • http://investoralist.com Dana

    Weakonomist,

    Thanks for commenting. Good to see you on the blog, but whoa, easy there!

    I don’t have an MBA, but I do have an undergrad business education (as it’s done in Canada), I’ve also worked on my CFA (I’m a level II candidate if that matters), so I get the gist of things.

    I think the point one of my CFA charterholder sources was trying to get across is that at least prior to the crash, the majority of MBAs go into either consulting or finance (a fact, any b-school career centre pie chart will show you that) after graduation. MBA does offer a much more diverse selection of courses and more exposure to all fields of business administration, whereas the CFA is finance with a sprinkle of accounting.

    But as far as most investment-related firms are concerned, a CFA holds just as much weight when it comes to finance-related knowledge as an MBA, if not more. Besides, in recent years, there does seem to be a dilution in the value of an MBA, with more and more people shelling out money to get those letters behind their names.

    Not all MBAs work on Wall Street, of course not, many work in industry, some are even unemployed. Same with CFAs: not all work in large wealth management firms or hedge funds on Wall Street or Conn. There’s a shift of CFAs now doing portfolio management work with smaller investors.

    Again, thanks for dropping by, and all the best in getting both under your belt.

  • http://investoralist.com Dana

    Weakonomist,

    Thanks for commenting. Good to see you on the blog, but whoa, easy there!

    I don’t have an MBA, but I do have an undergrad business education (as it’s done in Canada), I’ve also worked on my CFA (I’m a level II candidate if that matters), so I get the gist of things.

    I think the point one of my CFA charterholder sources was trying to get across is that at least prior to the crash, the majority of MBAs go into either consulting or finance (a fact, any b-school career centre pie chart will show you that) after graduation. MBA does offer a much more diverse selection of courses and more exposure to all fields of business administration, whereas the CFA is finance with a sprinkle of accounting.

    But as far as most investment-related firms are concerned, a CFA holds just as much weight when it comes to finance-related knowledge as an MBA, if not more. Besides, in recent years, there does seem to be a dilution in the value of an MBA, with more and more people shelling out money to get those letters behind their names.

    Not all MBAs work on Wall Street, of course not, many work in industry, some are even unemployed. Same with CFAs: not all work in large wealth management firms or hedge funds on Wall Street or Conn. There’s a shift of CFAs now doing portfolio management work with smaller investors.

    Again, thanks for dropping by, and all the best in getting both under your belt.

  • James

    I concur with Dana on this one. Personally, I know people on Wall Street (started on Bay St…in Canada), who got an undergrad in Business, then worked as ibankers etc. (bore me to tears already) and wrote the exams. No MBA, and they have done very well in the big shops; Credit Suisse, JP Morgan etc.

    Though I would like to point out that, many of the great trend calls are not made by MBA’s or CFA Charter holders; Jim Rogers, Peter Schiff, Marc Faber etc.. As much as the people that hold the charter say that the CFA is still relevant, it’s evident that it’s tough to see the forest for the trees when trained to focus so intently on the minutia.

    Thinking the liberal arts might be more useful.

    Regards,
    James

  • James

    I concur with Dana on this one. Personally, I know people on Wall Street (started on Bay St…in Canada), who got an undergrad in Business, then worked as ibankers etc. (bore me to tears already) and wrote the exams. No MBA, and they have done very well in the big shops; Credit Suisse, JP Morgan etc.

    Though I would like to point out that, many of the great trend calls are not made by MBA’s or CFA Charter holders; Jim Rogers, Peter Schiff, Marc Faber etc.. As much as the people that hold the charter say that the CFA is still relevant, it’s evident that it’s tough to see the forest for the trees when trained to focus so intently on the minutia.

    Thinking the liberal arts might be more useful.

    Regards,
    James

  • http://investoralist.com Dana

    James,

    Thanks for the comment!

    I think liberal arts, when taught thoughtfully, can have more lasting benefits on a business mind than a direct business degree. At this moment, most business degrees still stress more on the technical and the modeling, and little to really expand one’s horizon beyond the box that defines the business world.

    Yet to be a really outstanding business person and shrewd investor, one needs to possess the ability to challenge conventions and ask tough, sometimes heretical questions. Nurturing that kind of curiosity is usually not part of the curriculum.

    Business education, and education in general will have to change. With time, I think it will. The rise of technology and various issues raised through this recession will have an impact on that.

  • http://investoralist.com Dana

    James,

    Thanks for the comment!

    I think liberal arts, when taught thoughtfully, can have more lasting benefits on a business mind than a direct business degree. At this moment, most business degrees still stress more on the technical and the modeling, and little to really expand one’s horizon beyond the box that defines the business world.

    Yet to be a really outstanding business person and shrewd investor, one needs to possess the ability to challenge conventions and ask tough, sometimes heretical questions. Nurturing that kind of curiosity is usually not part of the curriculum.

    Business education, and education in general will have to change. With time, I think it will. The rise of technology and various issues raised through this recession will have an impact on that.

  • Andrew_red

    Roadblock? You don’t stand a chance.

  • Guest

    Hi
    The CFA and MBA are both educational degrees. However, the CFA, in addition to be educational, it is more “technical”.

    In addition, you should note that earning an MBA is “easier” than being a CFA. In the CFA, you have three levels challenging you. Under the three levels, you either pass or fail. Nothing supports your performance but your HEAVY 1000 HOURS studying. However, under the MBA, you have many other things to support your grades and success. Such things as, quizies and midters (before the final exams), attendace, participation, communication with professors, etc. Therefore, there’s no cutoff point like the Pass/Fail CFA. If you failed the midters, you have the final exam and maybe other quizzez to balance you. If you are abit below the passing exam criteria, you have your attendece or term project to lift you up.

    Regards,

  • Kamal hyder

    All I read here is pro MBAs attacking pro CFAs? What if someone holds both or even an additional ACCA with these two? Or is it just wasting precious life time and wandering around confused

  • Jimmy

    “where if you don’t have both you hit a road block in the career”. Tell me 5 CEOs who have both..Sorry to tell you this..its nothing personal..but this is the most naive and stupid statement i have ever encountered online. As i said..is by no means personal. I myself study for CFA and plan to do an MBA afterwards. But with this statement, oh dear, you are pushing your luck mate…

  • Guest

    CFA charter should be compared to a PHD (both average 4 years period). However, although a PHD is more prestigious, the CFA charter is more difficult in terms of obtainability.

  • Bradleydrivn

    Hilarious

  • Guest

    Yup. CFA charter is more difficult to obtain. At least in PHD you don’t live the stress you face during the CFA charter studies.