So you have a couple of years of experience at a Wall Street firm, but you intend to rise up further in the world. The time has come to go back to school. For many in finance, that means obtaining a Master of Business Administration (MBA) or cracking the books in order to prepare for the Chartered Financial Analyst (CFA) exam.
But which offers the better path toward success? It depends on what you want to do with your career, what you can afford in both time and money, and your drive. There are rare individuals who have the talent and money to get both, but which choice is fundamentally superior depends on whether you wish to enter management or take a more quantitative role toward stocks.
Different Strokes for Different Folks
The first thing to note is to make the distinctions clear between these two programs. MBAs have been the more traditional route toward business success. A successful Wall Street worker headed to a business school can acquire general skills in management, marketing and operations management. After graduating, he can advance to a higher position on Wall Street or take a management position in another industry.
But as Wall Street gets more analytical and data-driven every year, the demand for specialists with quantifiable skills continues to increase. That is the purpose of a CFA. About 23% of CFA charterholders work as portfolio managers, using formulas and models to understand markets.
While such a quantifiable approach might seem to fit well with investment banking, investment bankers are overwhelmingly MBA graduates. Still, a CFA presents a major opportunity to acquire key investment skills as opposed to more general business skills.
The Money Problem
One of the most differences between a CFA and an MBA is that passing the CFA exam is vastly cheaper. Like the cost of university degrees in general, MBA costs continue to spiral. The total cost of an MBA at elite business schools can be more than $100,000 per year, and that does not even take into account the opportunity cost of quitting your job for two years to get that degree.
By contrast, a CFA exam costs just about a $1,000. However, there are additional costs. Anyone serious about studying for a CFA will need to purchase textbooks, study aids, practice exams and other products to improve their chances of passing the exam, and this can add another $1,000. Even so, a CFA is far cheaper and a better option for those who don't have the money for an MBA or don't want to take on a lot of debt to pay for one.
Such a vast financial difference should make any investor think that there is a catch, and there is. While an MBA is much more expensive than a CFA, it can also be easier. Many people will take two years to obtain an MBA, and can sometimes count on their company to help them during that time or on it promising to rehire them when they return. But while a CFA requires about 300 hours of study for each of its three levels, people studying for a CFA often are still working at a full-time job and studying during their free time. That may explain why in 2015, fewer than half of candidates passed the Level I and Level II exams, and only 53% passed the Level III exam.
While the low chances of passing the CFA exam are an impediment to getting the credential, these stringent standards have an upside when it comes to finding a job. There are far fewer people in the business world with a CFA than an MBA precisely because of the higher difficulty. This means that while there are concerns of a glut of MBAs, no few such concerns exist for those with CFAs.
This is balanced out by the versatility of the MBA degree, where holders have worked on a wide variety of skills. But this is only relevant for those who graduate from an elite school, which ties into another problem with getting an MBA. While a CFA charterholder will be fine with just passing the exam, an MBA from an average school will have only limited value. Much of an MBA's importance comes from being able to make key connections over those two years, and there will be fewer valuable connections at lesser schools.
You Get What You Put Into It
Everything listed above may make it seem like a CFA is a superior option to MBA, and there are certainly advantages toward studying for that exam. But you have to remember that, in general, management has been the domain of those with MBAs.
Still, if you are willing to put in the work and study night after night for years, a CFA can offer a more reliable prospect of employment at a much lower cost. The highs of a CFA are probably not as high as the highs of a good MBA, but it is a safer option.
Neither choice is wrong. In fact, there are schools that are working to give students a chance to get both. But before making this crucial distinction, it is important to understand the different opportunities that these two choices hold.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.