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

If I was eighteen, and clueless about what I wanted to do with my life, I would do business school all over again.

I’m not eighteen anymore, so I would not go back to business school.  Not when there are many other ways of learning out there.

1. I’m not fit to give you any business advice

A couple of months ago, a friend of mine headed back to school in a remote community in interior BC.  She wrote to me, excitedly about her new surroundings.  She was also excited about a business idea she’s had: the campus was set up miles away from the nearest town, so why not start a grocery delivery service for the hungry students?  I was the only person she knew with a business degree, so it found me.

I started to write back somewhat vague and non-committal, than I stopped typing, hit the ENTER key, and wrote the following: “The thing is, a business degree is probably the least helpful to someone that wants to start their business, because in business school, all we got trained on was how to service someone else.”

I wrote this to concede that I had little practical advice for her.

I was not wholly clueless when it comes to entrepreneurship – I did get my hands dirty on a business for a couple of years during university, and that has proven to be one of the biggest confidence-booster of my life.  But whatever skills I had gained during this time became neutered in a classroom setting.

School trained us to become task-masters, one that is great at driving efficiency, expediency, and a razor-sharp ability to prioritize.  We become extremely proficient at functional tasks, but terrible at matters involving creativity and imagination.  It takes a smart and able person to answer a question correctly, but a non-conformist to re-phrase the questions posed in the first place. In face of the current crisis, I think that kind of out-of-the-box inquisitiveness might have been helpful.

But perhaps that was the plan all along with business schools and their generous donors. Just like the military, business schools are probably better at training problem solvers instead of thinkers.  It didn’t profess to churn out Aristotles that philosophize.  Equipped with plenty of discipline and normalized by years of standardized training, we marched into the corporate world.  I then got into bed with Excel, let someone else worry about the bottom line, and became a cog.

2. Business school made us masochists

I was a mediocre student at best, struggling to keep up with endless lists of projects, papers, presentations.  After four years of hard labor, I barely made it out with honors.

The only subject that I liked was statistics.  Not because I was a huge fan of means and standard deviations, but because statistics was the only subject where the exams were open book!  All other subjects had exams that required an immense and inexhaustible capacity to memorize and reproduce.  Whether they’d be accounting principles and subsequent treatment of business scenarios, or spewing out every piece of marketing jargon that we could to cram into a 30-page exam, or to reproduce mind boggling hedging formulations. Exams were like bulimia for the brains.

The mantra in business school was “work hard, play harder”.  It wasn’t until I left school that I found out this was the mantra employed by every other sports team or cultish business organization.  Most of us bought the idea wholesale, because work and partying looked so cool in movies, and it worked for a while with coffee slurping and caffeine pills popping.

The type-A success stories graduated to high-rolling careers in banking or consulting.  When alumni visited our school, they would boast of working 80, 90, or over 100-hour weeks – because they were so dedicated to their careers and cared so much.  We were in awe.  They told stories of themselves falling asleep in the shower or taking naps in the bathroom, we thought they were hilarious.  Worse yet, most of us thought we could beat that.  Because at 22, we were all Superman with complete disregard for our bodies, and working inhumane hours get you a badge of honour.

3. I’m not sure I would trust me with your money

I can’t say it with a straight face anymore. But back then, “maximizing shareholders’ value” was something we strived to put on every slideshow that could fit during case study presentations.  If you’ve been to a business school, you know what I’m talking about.  It’s nothing to smirk at.

There is a fine line between corporate responsibility and civil responsibility.  Sometimes the line is gray and very blurry; other times it is, unfortunately, a zero-sum game.  I’m sure all business professors are well aware of the fact, and it must be a struggle to instill business principles into our impressionable mind, without crossing that line of ethics.  Because every marketing principle, every tax minimization tactic, and every financial hedging strategy could be turned into something sinister and potentially corrupt in the hands of an ethically ambiguous individual.  Give that person a budget to work with, put in some skewed incentive structures, add lax regulation, sprinkle genuine misunderstanding and ignorance of the marketplace, then top it with a 90-hour workweek, is it really any surprise that within the last ten years, we’ve had three severe instances of corporate breach?

The bursting of the tech bubble in the early 2000s was partially blamed on the team of analysts that talked up stocks despite evidence to the contrary.  Failing to sniff the trail of accounting misconduct and fueling the speculative frenzy based on investment banking relationships, the stock market wiped out $5 trillion of market value.  Everyone had invested in the stock market then, and almost everyone I knew lost money, directly, or indirectly.  That includes my college fund.

After 9/11, accounting scandals surrounding Enron and Worldcom, among others, eventually brought down Arthur Andersen, and forced the SEC to examine the relationship between auditors and their consulting branch.  We were in school then, and we most definitely did not delight in learning the new rules ordained by Sarbane-Oxley.

Again, the first decade of the 21^st century, saw us failing again to learn from neither the speculative hubris of the tech bubble, nor from the accounting fraudulence of the Enron era: banks, lawyers, and accountants had helped to create a debt-induced housing recession.  Skeptics that doubted reckless lending practices were either ignored by the authorities, or chided by the mainstream media.

It could’ve been isolated cases of bad apples that got us to where we are today.  But it is hard not to see those disastrous endings as results of concerted, if not colluded effort by those in charge.  Incentives are a huge part of the problem, and so is the overall framework in place that resulted in the hubris.  So it really begs the question from or an ex-business school student: who’s at fault here, the system itself, or the people in charge of the system?  And given the system and the opportunity, what would I have done?

4. Where did our sense of humor go?

We all took ourselves so seriously.

We studied separately from the rest of the school.  We had our own buildings, and were usually only friends or housemates with people from the business school.  We studied in private meeting rooms named after wealthy donors, many of which were heads or former heads of something publicly listed.  We held roles in clubs manned exclusively by business students.  The air of self-importance, cliqueness, and hierarchy can put Mean Girls in a corner.  At 18, we wore our first power suit, trying to walk on heels while looking professional.  At 20, we were using various permutations of the word strategy without really understanding what it meant.  At 22, some of us had signed on to jobs that made more than our professors, business professors!  On some days, it’s a wonder how all our egos could fit in one room.

I’m sure some people had it all figured out, and probably saw the whole thing as one big joke.  I was not bright, so I went along for the ride.

5. In pursuit of sustainable careers

Talking about career burn-outs in a big banking firm for a 22-year-old was not unlike talking about hangovers from the best frat party.  It sounds painful but the sheer awesomeness of the job, and the doors it would open for you, would makes the pain worthwhile.  At the time, the popular roadmap for soon-to-be bankers was to toil as an analyst for two to three years, then leave to get an MBA, or to move on to the buy side.

It occurred to me a while ago that this short-term mindset is hardly the exception among bankers of all ranks and ages.  Hardly anyone I know had plans to stick around for the long term at one firm, and nor should they have.  But the issue of employee attrition may be the problem behind a genuine disregard of corporate responsibility.  Short-term financial incentives begets short-term profiteering behaviour.  And when an entire layer of a business is expected to depart after two or three years of sweatshop labour, how realistic is it to expect the firm to create and foster a culture that emphasizes anything long-term? So is it any surprise that a couple of years of record profits were made on backs of unreasonable risk-taking activities?  No, because they were offsprings of short-term thinking.

It’s hard to say how much structural changes will really take place as a result of this economic fall-out. Business cycles will most likely continue oscillating in response to economic activities, and careers will be made and then broken.  But as business owners, investors, consumers and employees, a longer term, more sustainable way of doing business, of investing, of consuming, and of working, may be a solid way forward.

picture source: ~roscofox