While there seems to be an extra-large alphabet soup bowl of designations in investment management, there is one designation that tends to be universally respected. The Chartered Financial Analyst (CFA) designation requires passing three sequential levels of six-hour exams, as well as four years of relevant work experience in order to become a charterholder. The first level of the exam is offered in June and December, while the final two levels are offered just once a year in June.
Pass rates for the most recent exams are as follows:
December 2010 Level I: 36%
June 2010 Level II: 39%
June 2010 Level III: 46%
The numbers show the challenging nature of the exams, and in fact, the average successful candidate takes four years to pass all three levels. According to the CFA Institute, there are now around 94,000 charterholders worldwide.
Perhaps the most challenging aspect of the test is that it is self-study. After signing up, you will receive a large box full of textbooks containing the curriculum for that level, as well as a number of corny/slightly humorous postcards that you can send to your friends and family telling them that you will be unavailable for the next few months as you study. The convention is that it takes about six months or 250 hours of study to pass each exam. Candidates with undergraduate degrees in finance may be able to get by the first level on fewer hours of study, but my guess is Level II takes many candidates more hours than that (especially factoring in candidates who have to take the test twice).
Currently, I am awaiting results from my June Level II exam. As expected, it was much more difficult than Level I. Indeed, many candidates have told me that Level II is the most difficult exam. Level III focuses much more on portfolio management, which is my day job, so I am hoping that they are right.
MBA or CFA?
Students and others interested in working in finance often wonder whether their time would be better spent pursuing an MBA or the CFA designation. Here are some considerations:
Time: As noted earlier, the average CFA candidate takes around four years to complete the program. Additionally, the CFA Institute requires 48 months of relevant work experience (and they do mean relevant – just making copies and fetching coffee at an investment bank won’t count). A full-time MBA can be completed in two years or less.
Winner: MBA
Monetary Cost: Level I of the CFA costs $1,035 (including a $405 one-time program registration fee) using the earliest sign-up date. Subsequent exams cost $630 (again using the early bird discount). A candidate who takes four years to successfully complete all three levels will spend less than $3,000, excluding discretionary additional study materials. MBA programs range from several thousand for an online school to more than $150,000 for Ivy League programs (Forbes puts the average cost at $100,000 in 2006).
Winner: CFA
Opportunity Cost: Because the CFA exam requires significant work experience, most candidates are employed full-time. Therefore, the opportunity costs tend to come in the form of greatly reduced leisure/family time. It’s difficult to put a generalized dollar figure on not being able to go drinking with your friends, but it’s probably safe to say that it is somewhat less than what an MBA student gives up in foregone salary and benefits.
Winner: CFA
Difficulty: This category is somewhat subjective, as an MBA from the University of Phoenix is probably somewhat less difficult than an MBA from Wharton. Still, nearly everyone who is accepted into an MBA program finishes with a degree, while fewer than 20% of candidates who begin the CFA program will eventually become charterholders.
Winner: MBA if you are looking for an easier path, CFA if you want to be challenged
Payoff: Because of the work experience requirement, there aren’t any true entry-level CFA charterholders, so a mid-career comparison makes the most sense. Even then, accurate numbers are tough to find. Mid-career estimates for CFA charterholders range from $120,000 (on Payscale) to $240,000 (from a 2008 interview with a CFA Institute official). Average MBA salaries are somewhat lower, with one article putting the number at $94,000. Of course, these numbers aren’t completely reliable, as some CFA charterholders may also have MBAs. And geographic issues could skew the numbers as well – my guess is there are relatively more CFAs living in high cost of living areas like NYC and other financial centers abroad than there are MBAs.
Winner: CFA
Conclusion: As someone with an MBA and a current CFA candidate, I know that both have added value to my career. In a perfect world, everyone would learn management and other “soft” skills through an MBA program and prove their knowledge in finance through the CFA program. However, it is not a perfect world and if I had to choose I would assign a much higher value to the CFA program. Granted, I didn’t go to a top-tier MBA program, which could add tremendous value through networking opportunities. Still, if I were hiring a new investment analyst and all else was equal, I would choose the non-MBA political science major with a CFA designation over an applicant with only an MBA, even from a top school. The CFA exams make you prove that you are competent in a broad range of investment topics, not to mention dedicated enough to devote several years to earning the designation. An MBA graduate may have the same skills, or might just be well-connected.
Readers, what do you think? Is the CFA or MBA more valuable?
Small Enough To Fail 
I’m afraid I have to totally disagree with you. Although a simple analysis like the one you provided is seductive, it misses a fairly crucial point in that the value of any qualification (even though the CFA is not a qualification) lies in advancing your ability to actually do the job (and in this case I am talking about being an investment analyst). If as an analyst you want to do the same kind of analysis as every other analyst in this industry (for reference I am investment manager, having worked in the industry for over 15 years) and therefore add very little value to anyone, then by all means pursue a ‘reversion to the mean’ qualification like the CFA. On the other hand, if you want to be taught about the dynamics of businesses and therefore be able to think creatively about how businesses may develop in the future, which in my very humble opinion should provide you better performance, then cherish your MBA. The level of difficulty of an exam does not help in assessing the ability of an analyst, it simple self-selects overachieving process machines. The only way to stand out from every other CFA charterholder in this industry is to think differently!
JPRDragon
JPR – Thanks for the comment. I think the CFA designation has value in advancing one’s ability (few MBA programs go as deep into security analysis as the CFA program), and, perhaps just as important, proving at least a minimum level of competence to perform a job. After all, a top-tier MBA might get you in the door most firms, but if the choice is between a middle or lower tier MBA program and the CFA program, I think most hiring managers would assign more value to the CFA. And if you don’t get in the door, does it really matter?
I will agree with you that analysts add very little value if they are just clustering their estimates and recommendations around every other analyst. I’d argue that is a company culture problem, in that most of the time it doesn’t pay to stick out from the consensus. The CFA Institute does try to advocate for best practices in investment management, but I don’t think it’s fair to lump every charterholder together into one monolithic group. For example, I’ve met CFA charterholders who are technical traders – not something that is exactly encouraged by CFAI.
Anyway, it sounds like you got a lot out of your MBA program, and I’m sure it only helped you become a better analyst. I think there is value in both, but again, if I had to pick one, it would be the CFA program over all but the top few MBA programs.