Usefulness of CFA in Managment Consulting

As you may see in the 13th Survey I just started on the blog, people are thinking that Management Consulting would be a next "place to be" after the crisis. I thought that it would be interesting to analyze how different financial credentials are applicable to management consulting job.

CFA - This credential is very well rounded. When you study for CFA you need to learn not only about the basics of financial mathematics, but you learn in depth about companies balance sheets and accounting in general. You learn about ethics, about rules of proper conduct etc. This knowledge and especially the breath of this knowledge may be a good preparation for the career in Managment Consultancy. In fact I know number of people, who got their charter and joined top consultancies (McKinsey, Bain, BCG). From what I hear, it seems that the knowledge they got from CFA is much more valuable than what they learned in their Masters degree for example.

FRM - Some of my friends with FRM work in Consultancies (like KPMG, Ernst) in risk departments. In fact these departments grew significantly in recent years and there is really quite a lot of hiring in these space.

CAIA - This certificate is very focused on alternative asset managment, and I haven't heard of anyone, who had it and worked in consultancy space.

PhD - There is some demand for PhD from Consulting Firms (mostly McKinsey), but from my observation PhD in Finance or Economics are not really prefared. It seems they like more PhD in "soft" sciences like PhD in Public Policy, PhD in Medicine etc. Companies like McKinsey attract PhDs to inject some non-standard thinking into the firm. However, PhD in Finance or Economics think very alike MBA students and CFAs, so they don't add much.

MBA - MBA has been the most standard way of getting into Managment Consulting. Companies like Bain or Booz Allen Hamilton recruit most of their employees from MBA students at the best universities. Some companies (like McKinsey) put so much emphasis on MBA business education that they tend to send majority of their non-MBA employees to MBA courses at Top Business School around the world.

Summing up, considering the costs of the degree CFA can be an interesting alternative to MBA for everyone interested in managment consultancy jobs.

The light for financial industry is even brighter...

After the word of Soros, who claims that the lowest point of the downturn is behind us, and number of other market practitioners there is now even more optimism in the financial industry.

The most notable signal I observe is the revival of the job market for graduates. In last two weeks I observed number of companies approaching students in London. Just to mention few, I have seen a private equity company (Blackstone) willing to find 4-5 interns for the summer, a management consultancy (Bain) willing to find 2-3 graduates for full time job from summer 2009.
It seems that companies are now expecting the worst to be over and they are preparing themselves for the possible recovery.
It seems that financial degrees and CFAs or CAIAs are not dead yet. It seems that people with these qualifications will probably be able to find a job really quickly, when the markets improve. This means that starting CFA or a Masters degree in a respected institution might be a good choice right now. When markets recover (and they surely recover sooner or later) graduates will be able to profit.

When the situation improves?

I think that's the question a number of people is asking right now. The mood in Investment Banking is very poor, and that translates directly into lack of employment opportunities... The sad truth is: the banks are not hiring.

In the worst situations are people, who quite recently invested in their education, and now are not able to find a job (example from Investment Banking Forum - please gives your thoughts on the forum). In many cases with debts and some other obligations, these people may be forced to look for employment in sectors other than finance. (An interesting article from Journal of Finance about the impact of the crisis on the lifes of MBA students - really worth reading at least the introduction)

The most important question right now is how long will the bad mood last. I asked this question to a head-hunter who is a friend of mine (cheers Craig!) and who forecasted the downturn at a time, when everyone else was certain that the markets would always grow. Now, he thinks that by the end of the summer the banks will finish writing-off the credit mess. He thinks that by the end of the year (Dec 2008) there will be some capacity in the banks to create new teams. He claims that the general revival will come in the first half of 2009.
I think that he may be right - he is really a great mind and knows the industry inside-out.

Now the question is "what to do during the slowdown"? I wrote about it before in my previous post: "slowdown a good time for education". I still think that each of us should spend the time most productively to polish and improve his or her CV. Doing a financial certificate seems to be a perfect idea. However, if you are forced to get a source of income changing an industry may be inevitable.

Sankaty Advisors vs DEShaw - MBA vs PhD Hedge Fund

Recently, I had an nice opportunity to attend company presentations of Sankaty Advisors (which is part of famous Bain Capital) and DE Shaw. These two companies are considered to be best Hedge Funds in their classes. Sankaty Advisors has very fundamental oriented investment strategy, whereas DE Shaw is considered to be purely quantitatively driven. Both companies generated superior returns in recent years.
I am writing about these hedge funds just to show how different opportunities Hedge Fund industry offers. Comparison of the profiles of these two companies shows that there is place in HF industry for both business major students with MBAs or CFAs (Sankaty Advisors) and also for those who have scientific background like PhD (DEShaw).
Sankaty Advisors invests in leveraged loans, high-yield bonds, distressed/stressed debt, mezzanine debt, structured products and selected equities. Sankaty Advisors puts great emphasis on fundamental analysis. They claim they always need to understand the business of any company they are investing in. If you would like to work in this firm, MBA or CFA would be highly beneficial.
DEShaw is mainly statistical arbitrage fund, so great deal of transactions is automated. Computers using sophisticated trading models are speculating on various markets and are exploiting subtle mispricings. Your mathematical background may be very useful in the process of preparing this models.
As the example of these companies show, hedge fund industry is not a solid entity. There is a number of different opportunities you may pursue if you want to work there and each of these opportunities may be prestigious and rewarding.

If I were to decide between these companies I would have a great problem. Both seem to be really nice. The presentations were on comparable level. However, I believe what I would learn in Sankaty Advisors would be more transferable. I could learn a lot about the business and "fundamental oriented investing" and then apply this knowledge somewhere else later. The same with DEShaw would not be that easy. There are not so many places in which you can use cutting edge quantitative skills. Maybe some statistical arbitrage desks of Investment Banks, but still the market is not that big for that. So, I claim that in fact Sankaty Advisors is a safer option for those willing to go for Hedge Fund industry.

If you know something more about various hedge fund please write about this in comments to this post.

And what about the CFA?

[CFA vs. the rest of the world]
The second deadline for the CFA Exam in December 2007 is approaching soon. If you want to enroll to this program you shall be fast. The exam fee will rise to 465 if you pay for it after 15th of August.
The CFA Institute is advertising the CFA designation as the most prestigious designation in finance. Is it true? Yes. That is true. All other (strictly investment oriented - so excluding ACCA for example) certificates like PRMIA, FRM, ACI etc. are definitely less prestigious, and less popular. The CFA designation, however, does not give superior money earning power as some people think. In terms of money earning power some credentials seem to be much more interesting.
In order to see which are most powerful credentials on the financial markets I conducted small research. I analysed the job offers on the efinancialcareers website. I was looking for the offers in which employers explicitly stated that they look for certain designations/certificates and education.
Here is what I found when I searched through all offers:

• There were 171 Jobs online in which Employer stated that FSA is an advantage
• There were 167 Jobs online in which Employer stated that ACCA is an advantage
• There were 153 Jobs online in which Employer stated that PhD is an advantage
• There were 144 Jobs online in which Employer stated that MBA is an advantage
• There were 139 Jobs online in which Employer stated that CFA is an advantage
• There were 80 Jobs online in which Employer stated that MSc is an advantage
• There were 3 Jobs online in which Employer stated that PRM is an advantage
• There were 3 Jobs online in which Employer stated that FRM is an advantage

From this data you may see that ACCA and FSA designations generally outperform CFA in terms of the number of job offers.

And what if you are interested in trading for example? (I put the word trading into the search) The result of the analysis is on the chart below:

This chart shows that when you are interested in trading CFA designation is worth less than good MSc education for example. Relatively, the CFA charter is even less rewarding in trading environment than in general. This chart shows also that PhD qualifications are dominating trading now.

The CFA designation, although it is not the most "powerful", has many advantages you shall consider. First, you may work while getting it. Second, it is obviously much cheaper than good MBA (although still expensive). Third, you have growing community - CFA may be even more powerful in the future.

My personally, I am going to get my CFA designation (I hope) although I am studying for PhD right now. I think that combining theoretical side of PhD with practical approach of CFA will make me really interesting asset on the Job market.

Why they give more to PhDs?

Lately, I had an interview in one of the investment banks in London for the position in the Fixed Income Research. The position was not an entry one as I had some experience with the stuff they were doing. I said that I was a Master's student at my university, as if I started working from September I would have only Master's degree (I need at least one more year to finish my PhD).
The guy I was speaking with told me that although he thinks I deserve at least associate position (I had prior experience), he can offer me only a second year analyst. He told me that this is because they don't offer any entry level associate positions to Master's students. Only MBAs and PhDs are eligable. I told him that I am sure that after 1 or 2 more years I need to finish my PhD I will not be more clever then I am today. What is more, I will probably forget a lot from this what I learned in finance (as I am doing PhD in Economics and I had MSc in Finance before). He agreed with this, but told me that these are the rules.

I was thinking why they offer Associate positions to MBAs and PhDs, but only Analyst positions to Master's. Case of MBA's is simple. Usually MBA students have already a lot of experience, because they need it before they boarded on the Top MBA program. Offering them Analyst position would be like wasting their potential. And what about PhD students? I think they get Associate positions not because of their experience (because they don't have it) nor their knowledge (because this knowledge is usually useless), but because of their... age! Usually PhD are simply too old to work just on the Analyst position! Can you imagine a PhD (of age let say 27) who is working at par with 21 old who just finished his BA? I don't!

Although I am pursuing PhD at very strong university, I believe that this rush on financial markets for PhDs is unjustifiable. PhDs usually are not much more effective in day-to-day work than typical Master students, but the this is just trendy to have many PhDs on the trading desk...