Businessweek recently ran an article discussing the upswing in MBA students who are also interested in taking the Chartered Financial Analyst (CFA) exam.
Approximately 32% of finance students are also taking the CFA exam, a 28% increase in the number of students doing so. The CFA is seen as a ticket to a better-paying job, and it’s why half the people taking the first-year CFA exam are 25 or younger.
My question: Does it make for better money managers?
The answer: Probably not.
The problem with all this education, especially at such a young age, is it produces investment managers more concerned about making money for themselves than their clients.
According to the CFA Institute, there are more than 95,000 charterholders in 135 countries around the globe. In Ontario, where I live, you either must have completed the CFA and have at least one year of relevant investment management experience in the 36 months prior to registering as an advising representative for a portfolio manager or have received the Canadian Investment Manager designation with at least four years of relevant work experience.
That’s why there are more than 7,500 CFA charterholders in Toronto alone, the highest per capita in the world. You simply can’t get an investment management job without at least some CFA exam experience under your belt.
The CFA Institute, like many of our business schools, has created an implied need through marketing and public relations that financial institutions and government regulators have bought hook, line and sinker. Who doesn’t know a doctor or lawyer who went to medical or law school simply because it paid well?
Perhaps it’s a cynical viewpoint, but when young people see the income potential of an investment management career, passion for investing becomes immaterial. Is this really who you want managing your money?
Business schools in recent years have been trying to defend their $80,000 educations. In January, Businessweek reported that the unemployment rate for MBAs graduating in 2011 was 14%, nine percentage points higher than regular college graduates.
Taken a step further, venture capitalist billionaire Peter Thiel, who had a lot to do with Facebook‘s (NASDAQ:FB) success, established a program in 2011 where 24 college students were given $100,000 to drop out of a university and focus their energy on creating things of real value for society. The establishment was aghast at the thought of someone promoting educational insurrection.
However, as Thiel rightly implies, the mere fact that college graduates aren’t getting hired these days and student loans total $1 trillion make the value of a regular degree questionable.
This is where the CFA Institute comes in. Having convinced employers that the CFA is an absolute must for anyone in a finance position, especially those who wish to manage money, it has reached out to business schools to broaden its domain. The biz schools see the writing on the wall: Ignore the CFA and lose more students.
Therefore, in conjunction with the CFA, universities across the world are incorporating the CFA material into their business school curriculum. You still have to pass the exams, but at least you get classroom training to better prepare for the annual June ritual.
It all sounds good in theory.
In reality, it’s simply confusing the purpose of education. I’d like to think those who choose to go to business school do so because they want to learn how businesses function. I’d also like to believe that those enrolling in the CFA do so because they are passionate about investing.
The truth is many enroll because it’s their meal ticket. That might not be so bad if we were talking about massage therapy, but unfortunately we’re talking about people’s retirements. And education does not equal passion.
University of Toronto professor Gus De Franco and University of Texas at Dallas professor Yibin Zhou conducted a study in 2009 that compared the performance of sell-side equity analysts with the CFA designation to those without. The professors concluded that the analysts with CFAs issued more timely forecasts than those without. However, they also concluded that on most occasions, the statistical difference from an economic standpoint — the only one that counts — was negligible.
What does all this mean?
Many of the best investors, entrepreneurs, and CEOs would have been successful regardless of their education. Warren Buffett was investing long before he met Ben Graham, and while Graham certainly mentored the head of Berkshire Hathaway (NYSE:BRK.B), I’m sure if the former professor were alive today, he’d take very little credit for Buffett’s success. Buffett is good at investing because he loves it to his core.
Society can continue to force educational standards on its citizens, but there’s little evidence to suggest that any of this improves job performance. And that’s especially true about the CFA. If it weren’t, we would see much better results from actively managed investments. And we don’t.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.