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