Episode 8: Binod's Real Talk on CFA vs MBA
Yes! Finally, we have an episode dedicated to the big questions.
No, not in life but in education.
I tackle some common, important questions that many students don’t know the correct answer to, resulting in them signing up for courses without knowing the HOW or WHAT.
Like what careers are CFA meant for? Equally importantly, what careers CFA does NOT prepare you for? What are the pros and cons of CFA vs MBA? How do you get into investment banking? How to pick a career? Etc.
This episode is dedicated to anyone curious about certain finance careers and courses. It is a short, frank, and unbiased analysis that will be of most value before you start your journey.
Real talk. From the Real Finance Mentor.
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EPISODE TRANSCRIPT BELOW:
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Binod:
This is Binod Shankar and you're listening to The Real Finance Mentor Podcast, from therealfinancementor.com. The Real Finance Mentor is your go-to resource for insight and inspiration on careers and finance, CFA and more. I would think, "Why this podcast?" Well, my goal is to deliver insight and inspiration for your finance career, but making it one, relatable. This is not theoretical stuff. We zero in on the critical practical issues. Number two, authentic. No bullshit, no sidestepping. The topics, guests and questions are all from that perspective. And number three, take a chartered accountant, CFA charter holder, add 17 plus years as a corporate warrior, mix in 10 years of entrepreneurship, throw in a decade of full-time CFA training, add speaking, mentoring, cycling, and mountaineering and that's me. Welcome to the Real Finance Mentor. Or as they call it, RFM.
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Binod:
This is Episode #8 of The Real Finance Mentor podcast and I am the host, yours truly Binod Shankar.
Now that we are in the pandemic era, innovation is the necessity of a podcaster and I decided to be inventive. So, lo and behold my first solo episode. Before you run away, you must know it is about a critical, strategic topic and that is - ‘why do CFA?’ and ‘why CFA vs. MBA?’. And worry not, at the risk of sounding immodest, you WILL be engaged.
At this stage I normally introduce my guests but me introducing me will make me sound weird.
So, join me & get ready to listen learn and grow… even in these unprecedented times.
Now this episode is different because I am doing this SOLO! Why you think? Well, partly because I'd like to hear the sound of my own voice, but really seriously because there are quite a few queries that have been addressed to me over the past few weeks and months and I want to deal with that in this very unique episode of RFM forecast.
So, why this episode you think? Well, like I said, I want to focus on some common queries about the CFA program, clear some misconceptions about the CFA program. So the agenda would be - what is CFA? What are the careers that you can get with the CFA qualification? And we also touch upon CFA versus MBA/Masters, the perennial question I get asked all the time. I'm going to keep this episode short, so I won't talk about the criteria of going to CFA or the curriculum, the topics, et cetera of CFA or how to write and pass the CFA exams.
All those topics have been covered and I will keep covering those in my blogs and my LinkedIn post, so that'll be taken care of.
So let's start this episode. The first topic, the first heading, what is CFA? Well, it's a postgraduate qualification, roughly equivalent to a master's in finance. It focuses on investing, specifically valuation and portfolio management. It's a technical qualification, which means it is deeper than it is wider.
It prepares you to become a practitioner. It is NOT your guaranteed entry to a top career in finance. I must stress this because people think that once you finish all three levels, want to get the charter, all the doors are going to be open for you. That's not the case. There's a lot more than just getting the charter. And for more information regarding the curriculum, the exams, the criteria, please go to the CFA Institute website, which is www.cfainstitute.org and you'll get a lot of information there.
So the next topic or the next area to talk about is what are the related careers? In other words, what careers does the CFA qualification prepare you for? Well firstly, CFA is not about "finance." It's actually not even about "investments." It's actually about investment management, so as you can see, CFA actually is a very niche qualification with a very niche curriculum and focus, so it's not meant for everyone.
It's meant for people who want to have careers in one or some of these three areas. What are the three areas? Number one, asset management. Asset management, again, I'm not going into great detail here. This is basically managing money; whether it's the mutual fund, hedge fund, pension fund or sovereign wealth fund. All these funds, for example BlackRock or State Street or Alliance Funds, or Investment Corporation of Singapore, or with Abu Dhabi Investment Authority (ADIA) right here in the UAE, is the example of a sovereign wealth fund.
This is where lots of CFA charter holders end up working. In fact, I think the significant part of them end up working there as either an analyst or as an associate, or you work as a deputy fund manager or senior portfolio manager, et cetera, et cetera. That's the first one, asset management.
The second one is called wealth management. Now wealth management is what you call private wealth management. You don't manage institutional money. You manage the wealth of rich people or what you call HNIs, or high net worth individuals. So there, you can be a relationship manager; you can be a product specialist or investment advisor who will advise the relationship managers who will advise the clients on markets, on asset classes, on specific instruments. You have wealth management departments of big banks. Almost every major bank around the world has a wealth management department and they employ CFA charter holders as well.
The third area where you see CFA charter holders and where the qualification really prepares them for is investment research, either equity research or bond research or some other kind of asset research. So you could for example, be an equity analyst issuing recommendations to buy, hold or sell a stock. You could be working on the buy side, which means working with investors or you could be working on the sell side with brokers for example.
You could be working as analyst or associate. So here basically what you're doing is, this is a very technical job by the way. This is probably the most technical of all three that I mentioned, where you use this kind of cash flows, price multiples, economic analysis, company analysis, country analysis. It's very fundamental driven. Of course some technical analysis may be thrown into the mix as well, but it is quite technical. And a lot of valuation work to be done, is a stock overpriced, under priced, what are the risks involved, et cetera, et cetera.
So three areas again I want to stress, which CFA really prepares you for - asset management, wealth management, and investment research. Now I get people saying, "Hey, I want to break in investment banking or I want to break into risk management", or "I want to be a trader in stocks", or "I think I should enroll for CFA." Now, sure you can enroll for CFA, but that's not really what CFA is preparing you for.
Now if you want to go into investment banking, investment banking is mostly about, of course there is some element of valuation and analysis of course. There's a lot of other stuff involved. There's also of course, a lot of financial modeling. There's a lot of communications- presentations to prospective clients and investors involved there, where networking becomes very important. So if you want to crack investment banking, then you should get into an MBA from a top school is my recommendation.
CFA? Sure you'll find CFA charter holders in investment banking, but really speaking, an MBA would get you a bigger chance, a better chance of getting into IB.
Number two, risk management. Risk management in the bank, or in a fund, again, yes, CFA does cover bits of risk management especially in level two and three. But again, it's not really a qualification meant for risk management.
You probably want to look at something like the FRM, right? Financial Risk Manager, which is purely, purely focused on risk and the different kinds of risks and how do you identify, measure, and manage them.
And if you want to be a trader, a day trader or an online trader, again, sure, CFA covers valuations and equities and bonds and all those things, but actually, it's actually training you or preparing you to become an investor, not a trader if you know the difference.
Trader is short term speculative, uses a lot of technical analysis, not so much fundamental analysis, whereas the investor is more long-term, more strategic, more complex fundamental analysis driven. He's not bothered about timing so much as making a return for his investors over the long term.
So that is basically the areas which CFA doesn't really prepare you for. Now, I should also talk about expectations. One reason why people sometimes get disappointed when they get into CFA is they actually come with very unrealistic expectations when they enroll for the program. And one unrealistic expectation I see a lot is about switching your areas.
So for example, if you want to switch from an area like IT or financial accounting or retail banking or engineering, and you want to get into, say investment management, irrespective of your age, don't really expect CFA to make that happen. Because like I said, it's basically meant for investment management butut remember, there are people who are far younger than you, more qualified than you, more experienced than you, who are out there looking for the same job.
So why would an employer hire someone who is in his early thirties or mid thirties and suddenly he wants to change his career, I mean, he might be a bright and hardworking and resourceful, et cetera, et cetera. I'm not denying that, but the reality is switching gets more difficult, especially with increasing age. The younger you switch, the better. Now you'll say, of course, "Hey Binod, this is very theoretical. If I knew that I want to do this when I was younger, I would have switched when I was younger."
You didn't know that. You want to discover yourself now. True, but they became pros and cons of trying to switch at such a late age. If you want to switch again, go for a top MBA because I know people who have been in engineering or IT, and actually I've interviewed quite a few of them on my podcast and they made the jump from engineering or IT, to investment banking, which is a huge jump, right?
Right in the heart of the city in London, but they managed that because they went to a top MBA school in the US, and they got in through campus selection into a top bank. Now that's again, we'll talk about MBA and the pros and cons later, but that's what will facilitate your jump, but not necessarily by studying for three to five years and slogging for a 1000 hours and getting a CFA charter, which while might enrich your learning a lot, may not get you into the career path that you want.
So, time to talk about CFA, drill down into the pros and cons, the pluses and minuses. Now I should emphasize that some of these points I'm going to mention are not really pros and cons, but are really deliberate features of the program because of what they're trying to prepare you for.
So don't see it as a negative or as a huge positive. That's the way the course is designed, although some are clear benefits, some are clear pros, as you can make out.
Now let's talk about the pros because I'm a positive guy. Let's start at the plus points of CFA. Number one, easier to get in. All you have to have is a degree. In fact, you can write level one in the final year of a degree program. That's easy.
Number two, it's relatively cheaper. I use the word relatively, and I'm comparing to a masters or MBA program. You might spend approximately, if you self study, about $3,000 over about three years, an average of three years, which to be honest, to get a world-class qualification like this, is a steal.
It is self study like any other certification like CA or CPA or ACCA, which are all self study, which also means that it is more flexible.
You decide when to study and when to prepare for, and write the exam. Of course the exam dates are fixed, but then you pick which exam slot you want to write.
You can study and work, which means you earn while you study, which is a huge advantage. You can't just take two years off sometimes for MBA. So CFA is a very cost effective solution.
Of course, it's unique. I mean there's only one CFA institute globally, right, thankfully. And this endows it with a lot of credibility.
It is the gold standard in investment management globally, not finance, investment management because as I said, CFA is a niche qualification.
It'll make you technically fluent because it's technically very rigorous as I mentioned. It is deep, but not very wide. You'll become a practitioner; you'll become a technically fluent practitioner.
You will learn a huge amount about investing, irrespective of your background. And that's one key takeaway I've got from almost all my students over the last 12 years. You will learn a lot about investment tools, economics, quants, financial reporting, equities, bonds, derivatives, alternatives, real estate, whatever. You'll cover all that.
It's highly respected, it's got a great network of alumni in terms of members and charter holders across about 140 countries. And you have local societies and events in almost every country. I'm with CFA Emirates, I'm on the board of CFA Emirates, we have about 1000 members, we're one of the largest societies in the region, and we have regular events either face to face or in the form of webinars and things like that.
Same holds true for societies in India, in China, and of course every country in Europe, quite a few countries in Africa, et cetera, et cetera.
So these are the pros of the CFA program.
Now the cons, again, when I say cons, I just mean relatively, and I also mean that some of those cons actually design features, not flaws as such, everything's relative.
So one con of course, obviously, I think you know that anyway, it's very hard to pass relatively.
It's very easy to get in, but very difficult to get out. The 20% pass rate on average of people who pass out of level three, compared to those who go into level one, this gives an indication of how tough this program is. Of course, pass rates vary by region, but global average, it's about 20%.
A lot of time required. You should prepare for about 1000 plus hours of study over, I would like to say two years or three years, but actually it's quite indeterminate.It all depends on how hard you work, how much time you have, how focused you are. I finished mine in two years flat, that's because I was obsessed with getting the CFA. I was allowing no distraction to stop me or delay me.
If you're weak in accounting and/or finance, you will struggle in CFA. I said struggle, I didn't mean it’s impossible, you can do it. But a lot of level one and level two is about financial reporting and analysis, and if you have a good background in finance or accounting especially, either in college or through CA or ACC or CPA, it helps a lot.
And forget about the exams actually. Even if you become an equity analyst or a portfolio manager, you will be basically tearing apart financial statements. So you've got to know your accounting very, very well. Finance is built on a solid basis of accounting, as you know.
If you fail, you must write the entire exam again. This isn't like university or college or some programs where if you fail two subjects out of five, you just need to write the five.
No. If you fail level one, you have to write all the 10 topics of level one again. Same thing goes for level two and basically for level three as well, which can be a pain as you imagine, right? I mean writing all the topics, studying for all the topics.
It's a self study program unlike college where you have professors and a curriculum and structured classes and assignments and interim evaluations. This is self study, which means as you should have imagined by now, you would need to be really, really hugely self motivated to learn.You need a lot of self discipline, self motivation, you need a lot of self drive because hey, you'd be sitting away in your house plowing through derivatives or the intricacies of quants, and you've got to be able to have the grit and growth mindset to basically research and crack that topic because otherwise you aren't going to pass.
Yeah, so that is very important.
Then of course, because it is self steady and you're not going to college, there's no campus. You're not meeting other participants as frequently as you would in college. You don't really pick up on soft skills. Things like negotiation, teamwork, delegation, networking, which are very important in real life, in career to get a job, to keep your job, to grow in your job.
But because like all self study programs, like all certifications, you've got to pick it up separately on your own. So again, it goes back to motivation.
You don't learn any real life technical skill like financial modeling, which is, as you know, very important when you go into investment banking or equity research and in many areas of finance. And it's one thing to know valuation theory, you can probably recite to me line by line the curriculum regarding DCF and price multiples and EV to EBITDA and blah, blah blah.
But probably if I give you a live case study of valuation, ask you to do that in Excel within the next three hours, you might struggle. And that's again because it is a self study program, and there's no practical application as part of the program. Although I must say that you don't get the charter unless you have four years of qualifying work experience, which the CFA insists should cover aspects of analysis and decision making, investment decision making, which assumes that you would have done some of this bit anyway regarding financial modeling.
But it's not part of the curriculum. There's no exam in CFA on financial modeling is what I'm trying to tell you.
Of course because again, it's a self study program, certification programs, there is no campus placement. If you passed an MBA or a master's program, you go to a top college, you normally have campus interviews where top companies come and interview you and basically you get to pick which role you want to take in which company if you are in the top 1% or whatever.
That doesn't happen here, which means that basically the career strategy, your career is in your hands, which again, I see a lot of times amongst CFA students, they outsource the career, or they forget about the career once they finish the CFA program, because they think that's it. Well that's not it, actually that's just the beginning. The CFA will open doors. But to really barge in and get a job, you got to really work hard on your presentation and networking and soft skills.
And of course, a lot of people are passing the exam around the world in India, in China, which means you need to stand out. It's getting increasingly difficult to stand out, but there are lots of ways of standing out. So if you're just another CFA level two or level three pass out, or just another CFA charter holder, it may be more difficult to get a job unless you can show that you're different from other people, that you have a special set of skills or knowledge, or traits, or behaviors, whatever.
Whether it is financial modeling or real estate, or equity in emerging markets, something like that. So you need to have that to stand out.
That's my spiel about the CFA in terms of pros and cons.
Let's talk about a program, which CFA gets always compared to, actually quite unfairly because it's not really proper to compare the two. And this program is the MBA, the Masters in Business Administration, what you call a Masters in Finance Programs.
And I say it's not really fair to compare both because both have very different target audiences and they prepare you for different careers and hence, the curriculum also is quite different. But comparison has to be made because people always think about these two. Again, when I talk about MBA, I'm talking about full time, like 18, 24 month program. I'm not talking about an Executive MBA.
Also again, when I say pros and cons, just like I said in CFA, they're not really pluses and negatives, more so as deliberate features of the MBA program. So just see it that way. Okay so if you're ready, let's start talking about MBA.
The pros of MBA.
Well, one pro of MBA is, it could be shorter than the CFA program as you must study and write exams as per a fixed schedule, right? Just like college.
So MBA programs typically finish in what, 18, 24 months. Now of course you can finish a CFA program in 24 months. I did mine in two years, but a lot of people take three, some even take five years to finish because you can decide when you want to study and write the exam.
Second point, second pro, if you can call it a pro or a plus point is, MBA is actually in many instances, easier technically, because see they are not preparing you to become a practitioner, even an MBA in finance, right? I mean you might end up becoming a finance director or a CFO or whatever, or you might be a consultant in a big 4or McKinsey, but it doesn't go into that much depth into investment management or valuation or portfolio management the way the CFA does.
So in that sense, I say it's "easier" technically.
Another point that you'll see because you have a classroom, and you have professors and you have teaching lessons going on, if you go to a top college, MBA college, some of these professors actually are thought leaders. So as a result, you get exposure to some fantastic new ideas even before they are made public, in finance, for example. That's a very good idea.
When your MBA is something else, like I said earlier about CFA, which won't happen in CFA, but which will happen in MBA, you will learn critical soft skills.
So a lot of MBA program is about project work and group discussions and teamwork, and making presentations to the professors, and to other teams and debates. So over the next 18-24 months, even the shyest, most introvert person would have to come out of their shell and engage and interact.
And that's the way you'll learn, unless you're forced to come out, you will never learn. Sitting at home going through a pile of books, sure, you will learn technical stuff, but you won't learn how to deal with people. So you will learn soft skills.
You will also get training on real world situations because MBA courses, the good ones, are mostly case-study based and case studies based on actual examples or as close to real life as possible.
So simulations, games, like I said, project work, all this means that you are getting very close to actually what you will do once you get a job.
Alumni network, again MBAs of course, one reason why people go for MBAs is hey, Harvard Business School or Stanford or Yale, they have a global alumni network that grows every year and you go to most major cities around the world if you are lost or you're trying to find connections, just hook up with your Harvard or Yale or Stanford mate and he's probably quite influential and he can open doors for you.
So alumni network is quite helpful in advancing your goals, be it career or otherwise.
Of course, like I mentioned earlier, campus placement, big schools, the big banks, the big companies, they come, they look at the candidates and they hire lots of them. Most of the students will come out of MBA programs of the good schools, they get hired even before the last day of school.
It is fantastic because there's no uncertainty there and you can actually sometimes... If you are good enough, you can actually pick which company you want to work with.
And of course the brand name, right? I mean there's nothing that says - this guy is smart, hardworking, diligent, like saying that I did an MBA from INSEAD or London Business School or Harvard or Stanford or any of the top 10, 20 MBA schools around the world.
So all these are the pros of an MBA program. Of course, everything has downsides and MBA is not an exception.
And I'm sure a lot of you know the exceptions already, but in my view, the cons are:
Number one, there are too many MBA colleges out there. There is, of course, Harvard and Stanford and Yale and MIT, and all of the big boys. And then you have some obscure MBA college from some remote town or city somewhere you haven't heard of in your life, which also means that if you want to enter the big league, there's no point in going to a low ranked college.
I know it's tough in terms of the GMAT scores and of course, MBA colleges are very, very expensive as well, which is my next point. The top schools are quite expensive. The college fees can easily run to 100,000 to $150,000 plus tuition, plus travel, and let's not forget the fact that you're not working while you're studying.
So the actual cost is not just how much you spend on the program and the flights and logistics, blah, blah, blah, but also the fact that you could have earned whatever, $60,000 or $50,000 a year if you had not been doing the program. However, I should say that despite the fact that these colleges are quite expensive, you can get loans. It's a little known fact that you do get loans from some big banks around the world, which you can pay back after you've finished the program.
Of course, loans come at a cost, but what I'm trying to tell you is that it's not impossible to get into the big colleges just because you are smart but poor, relatively speaking.
Again, MBA programs, they are wide, which is a pro, right? Wide means you'd cover in an MBA finance program, you don't just cover finance, you cover pretty much HR, maybe operations, bits of marketing, bits of organizational study and other stuff.
And of course, finance. So width is there, but there's not much technical depth relatively, compared to CFA. But then again, like I said, it's an unfair comparison. CFA is a practitioner's qualification. MBA is not. But cons are cons.
And of course, the 18-24 months that you spend at an MBA school, you can say it's quite inflexible and intense.
It's quite inflexible and intense because you can't decide when you want to study or write the exams. It's like college, right? I mean basically, yes you can pick your core courses and electives and all those things but the start date and the end date, and the dates of the exams are not fluid, they are largely fixed.
So again unlike CFA, there's no flexibility on writing the exam.
So the summary? CFA or MBA?
Well it's actually apples versus oranges. There is actually no "best" qualification. It depends on what you're good at, what you like, your skills and your opportunities.
If you want to be in investment banking for example, I'm not going to dig into that right now, but you should know the pros and cons for the investment banking.
It's a tough world out there. Very intense, but can be very rewarding financially and intellectually. But every career has pros and cons, right? If you want to be in asset management, again, there are pros and cons. So there are courses meant for careers.
So what you should do is instead of saying CFA or MBA, or CFA or masters, or CFA or CPA, you should decide what career you want and that should be based on your skills and what you like to do.
And then pick CFA or MBA. And please, please be clear why you are starting CFA, not just because all your friends and colleagues are doing it. That's just not a good enough reason because trust me, you will give up very soon. I want to repeat a point I made earlier, which is CFA is not a guarantee of a job or a career. Don't get me wrong, it's an excellent first step, right?
It's prestigious, it's respected, it's rigorous, it's a signaling device, signaling device in the sense that people know that this guy is smart and focused and ambitious enough to crack what is the toughest investment exam on this planet. So it signals to them that, that's what you are. It's not going to land you a job because there are a lot of other things that comes with landing a job than just passing exams.
You need to be good with people. You need to be able to network and interact and, of course, continuously stay up to date, especially in the field of investment management within finance, which as you know, is evolving quite rapidly with artificial intelligence, automation, et cetera, et cetera. Now of course for more information, I would again draw attention to the CFA institute website. I'll repeat the URL: www.cfainstitute.org.
So go over there, have a look at what the CFA program is about. Download the documents, listen to videos, Google, as always, Google is your friend, and find out more before you jump in. And of course, stay connected to The Real Finance Mentor blog and the podcast for more tips like this on education,careers and finance. That’s the whole idea why I started this website and this blog, and this podcast, so that people out there who need information and guidance can basically access it quickly and help them make up their minds.
So I hope this episode hasn't been boring, as you might've imagined at the beginning. Without a guest, it can be quite boring for you to listen to me droning on and on. But I hope it's been interesting and I hope that it inspires you to look in the right direction, and research.
And I hope you find what you want.
It's an important decision, so take your time going about it. Don't jump in and sign up for a qualification. Think about what you want do with your life. Talk to people, talk to seniors in the field, find out more about that field and then make your decision.
Drop me a line on my LinkedIn or you can drop me a line on my website. I'm happy to reply to any of your queries and till the next time, take care.
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Binod:
This podcast is brought to you by The Real Finance Mentor. Thank you so much for listening and I hope you found it insightful and inspirational. If you did enjoy this episode, please drop us a review and spread the word and be sure to check out more exclusive content on therealfinancementor.com and my LinkedIn profile, which is Binod Shankar CFA. Let's keep in touch. Just add your name to the mailing list on therealfinancementor.com and we'll tell you about new episodes plus book reviews, upcoming events, and blogs. Till the next time - onwards and upwards.