The debate is probably as old as commerce itself. Can competent business leadership be taught? Is it something inherited? Is it an inborn trait? Or can it be developed, taught, groomed, or nurtured? Can business schools teach students to develop habits, skills, practices, knowledge and analysis to become strong senior leaders of major corporations?
The Consortium's IN Magazine (online at http://www.inmagazine.cgsm.org/) permitted two Consortium alumni to tackle the same questions. They hold their "debate" in the latest issue. Alumni Michael Carson and Christopher Earley each take sides and go at it--of course, in a respectful, business-like way. There are no easy answers to the question, no matter if some think so. Carson and Earley recognize that in their analyses.
There are some skills, experiences and background senior managers and strong leaders must have. They aren't necessarily born with them. On the other side, some people have natural tendencies to manage complex organizations, convince constituencies of their points of view, and execute business strategy (or "make things happen").
In the leadership of global financial institutions, skills, background and knowledge are a necessity to lead and run complex organizations. Even the best bank CEOs of global banks can't run their organizations without a sufficient understanding of capital markets, market and credit risk, bank products, systems and technology, and financial regulation. More and more, they also need to understand global cultures, politics and economics.
But if all else is equal (meaning, if we assume among top-tier managers, knowledge and skills are equal), will the best leader be the one who learned leadership in school, learned along the way to becoming senior, or simply has an inherent ability to manage, execute, visualize and inspire?
When evaluating leadership, performance (based on such widely known metrics as return-on-equity or percentage increase in stock price or market value of the firm) counts for much. Performance will typically be the first benchmark in determining who is a good leader or who is mediocre and drifted up the ranks with good luck in hand.
The ability to execute counts, too. The best leaders--despite what might be happening on the bottom line--manage to overcome obstacles and resistance to get things done. That can be projects, acquisitions, expansions, and innovation. It can also be managing through disaster, catastrophe, or regulatory hurdles. Often, execution and performance are correlated
Charisma counts, too, although it's hard to define or describe. Strong leaders are able to inspire employees, get the best and most from them, and harbor a culture where people want to be there and want to contribue. They have that something special to win over clients, squash bureaucracy and inefficiencies, and encourage boundless innovation. They get others to follow them, because others believe the creed, understand the mission, or enjoy the culture within which they work.
The debate above is really then about whether these qualities and abilities can be learned in business school or developed along the path to senior management.
Business schools, we know, can't hand over a platter with a to-do menu that shows the budding executive how to be a strong leader. They can, however, study and assess strong leadership in the past and show how leaders were effective in numerous circumstances, business situations, or industries. They can show how they fared in financial difficulty or how they might have overhauled an organization through bankruptcy. They can show how they envisioned and pushed for expansion, innovation, or new ideas and products. They can show how they re-engineered companies, directed them into new businesses or products, or boosted performance by cutting costs without killing the enterprise.
In finance, over the past several years, assessing strong leadership has been tricky. Those who were described as powerful, effective leaders a decade ago were being blamed for the financial crisis years later. In 2005, few could be found who might have said the leaders of Merrill Lynch, Lehman Brothers, Wachovia, and AIG were incompetent, clueless or out of touch.
At Merrill, CEO Stanley O'Neal rode the coattails of a senior mentor, but proved himself along the way to be smart, detailed-oriented, meticulous, and extraordinary astute about cost-cutting and boosting Merrill's returns. He had a reputable background in investment banking and spent time as CFO.
Once the crisis came about, O'Neal was suddenly regarded as aloof, unaware of the risks the firm had been taking throughout its product lines, unfamiliar with the nuances of mortgage products and securitization, and incapable of gaining a full grip of the risk-management role.
Former Merrill CEO John Thain was considered one of the brightest, young leaders at Goldman Sachs during his rise there. He moved on to be the vital force that led the New York Stock Exchange out of the dark ages of sort by expanding the organization, taking it international, welcoming its electronic transition and revolutionizing how it oversaw stock trading around the world. Yet at Merrill, he is considered the one who never fully grasped the deep problems at Merrill or never successfully disclosed the extent of them to outsiders.
At Lehman, Richard Fuld for years was considered its heart and soul. He was the link to the old-boy Lehman, the senior banker who brought Lehman back from its early 1990s ashes (when it was owned by American Express) and marched it back to its prestigious bulge-bracket status by the mid-2000s. It was his leadership, many said years ago, that willed Lehman back into solvency in the late 1990s' financial crisis, when rumors about its liquidity problems almost sacked the firm.
Today, many consider Fuld (along with Bear Stearns' Jimmy Cayne) an example of senior leadership without a clue of how the complicated organization below him was run or with no understanding of the risks of mortgage products and high leverage on the balance sheet.
At Goldman Sachs and at the U.S. Treasury, Robert Rubin was considered a stalwart, bright leader. The history books say Goldman Sachs separated itself from the pack under Rubin's leadership. These days, some want to blame the financial woes of Citigroup on him, when he was a senior insider at the bank and observed much of the decision-making that led to disastrous results during the crisis.
The lesson here is that those who assess competent leadership shouldn't be so quick to attach labels. Or they should develop more careful, thoughtful criteria and assess leadership not over the span of a few momentum years, but the span of a long career. They should assess leadership in the face of many scenarios, circumstances and benchmarks.
This doesn't, however, address the original question: Are the best leaders born that way? Some are born with or develop traits that contribute to outstanding leadership: passion, confidence, enthusiasm, intensity, etc. Many, however, learned the trade along the way, mastered their industry or function, established networks and relationships, and sprouted from a foundation of skills they learned long ago (while in business school?). The best leaders combine skills and natural abilities: They combine accounting and finance skills with passion and intensity, for example.
There is no easy answer. Carson and Earley in their own essays tackle the topic and deserve a hearing. Some things can't be dismissed, however. If you plan to become a strong leader in finance or plan to lead a bank or financial institution, you can't do it without a competent appreciation and understanding of accounting, finance, capital markets, economics, marketing, organization management, financial regulation, and business policy--skills you can, for certain, pick up in business school.
Tracy Williams
Wednesday, October 27, 2010
Tuesday, October 26, 2010
CFN: Wrapping Up the Second Year
The Consortium Finance Network is nearing the end of its second year with over 480 members across the country.
We recently hosted our fifth in a series of webinars ("The CFA and the MBA"), continue to meet with students and alumni in finance, provide guidance to all wherever we can, and arrange connections among Consortium alumni and students. Discussion in our Linkedin group is lively and covers many topics. We update blog postings weekly.
As we wrap up 2010, we welcome feedback, ideas, and suggestions about where CFN can go from here. We encourage all to step up and support CFN in many ways. The Steering Committee meets often to assess ideas, plan and execute projects and contemplate where we go next.
We are considering forming an Advisory Board of experienced people in finance interested in CFN's objectives and interested in being continually involved. We welcome input on its formation.
We encourage all to contribute to the discussion in Linkedin. Tell us what's working and not working. Help lead projects, participate in Steering Committee meetings, or make meaningful suggestions. We'll all in this together.
In 2011, once again we hope to plan more webinars, networking events, and another first-year MBA guide. We hope to have a bigger presence at the Orientation Program and host a major alumni gathering (as we did in 2009 at the Federal Reserve).
We'll continue to pair students with experienced professionals and help them in any way possible (interview preparation, career coaching and strategies, etc.). And we want more input, involvement and enthusiasm from more members.
Within Linkedin or on the website, we encourage the exchange of ideas, experiences and viewpoints and the sharing of knowledge about any aspect of finance.
Share your ideas and feedback with us, and stay involved.
CFN Steering Committee
Tracy Williams
Rachel Delcau
Camilo Sandoval
We recently hosted our fifth in a series of webinars ("The CFA and the MBA"), continue to meet with students and alumni in finance, provide guidance to all wherever we can, and arrange connections among Consortium alumni and students. Discussion in our Linkedin group is lively and covers many topics. We update blog postings weekly.
As we wrap up 2010, we welcome feedback, ideas, and suggestions about where CFN can go from here. We encourage all to step up and support CFN in many ways. The Steering Committee meets often to assess ideas, plan and execute projects and contemplate where we go next.
We are considering forming an Advisory Board of experienced people in finance interested in CFN's objectives and interested in being continually involved. We welcome input on its formation.
We encourage all to contribute to the discussion in Linkedin. Tell us what's working and not working. Help lead projects, participate in Steering Committee meetings, or make meaningful suggestions. We'll all in this together.
In 2011, once again we hope to plan more webinars, networking events, and another first-year MBA guide. We hope to have a bigger presence at the Orientation Program and host a major alumni gathering (as we did in 2009 at the Federal Reserve).
We'll continue to pair students with experienced professionals and help them in any way possible (interview preparation, career coaching and strategies, etc.). And we want more input, involvement and enthusiasm from more members.
Within Linkedin or on the website, we encourage the exchange of ideas, experiences and viewpoints and the sharing of knowledge about any aspect of finance.
Share your ideas and feedback with us, and stay involved.
CFN Steering Committee
Tracy Williams
Rachel Delcau
Camilo Sandoval
Tuesday, October 12, 2010
Keeping Up: Basel III and "Capital Cushion"
Basel III is a term bantered about a lot these days, when people in finance ponder financial reform and try to list solutions to enormous risks banks took in the last decade. Basel III is no longer a proposal or a thesis of scholarly recommendations for how banks can clean up their crisis-torn balance sheets. Basel III is a set of risk-management guidelines that large banks are expected to follow. The leading nations (under the auspices of the "Group of 20") that help manage global economic and financial issues agreed Sept. 12 to implement Basel III.
Basel III, in its most basic form, provides capital and balance-sheet rules for banks around the world. The nations who agree to follow the guidelines also agree to enact, execute and enforce regulation within their own countries that adhere in principle to Basel III.
Basel III, of course, follows Basel I and II. Basel II never really got off the ground because its deadlines had not arrived. It was never fully enforced, because the financial crisis of the past few years interrupted. If Basel I and II couldn't minimize the severe impact of the crisis among banks, the logical goes, then a stronger, more effective Basel III could. Despite recent agreement among nations to roll out Basel III, it is not without critics, who believe Basel III might not be sufficiently tough enough to keep banks from accruing too much risk in the future or who believe its guidelines don't address the broadest set of banking and financial-system issues.
Basel whatever (I, II, or III) in spirit suggests that banks can protect themselves from unforeseen risks (bad loans, bad trades, market downturns and swings, interest-rate volatility, etc.) by having an adequate capital cushion. This is not about having capital to invest in business growth, new business or new acquisitions. This is about having capital as a balance-sheet cushion, a way to soften the blow when extreme risks or market catastrophe occurs--the kind we certainly experienced the past few years. The Basel guidelines offer a way to ensure that even unexpected losses will be bearable, a way to ensure that the banks' creditors, liability-holders, depositors, and lenders will be comfortable through a crisis (and be paid if debt is due).
Some global banks successfully endured the crisis because they managed risks carefully, avoided risky businesses and trading, and minimized losses. Other banks, despite heavy losses in mortgages and corporate loans, survived it well because they had ample capital--amounts far in excess of minimum requirements. The losses didn't hurt too much.
Whatever the capital requirements, banks manage business activity and growth around them. Given a level of equity capital, banks will determine the level of business they can conduct (lending, trading, brokerage, advisory, etc.) to ensure ongoing compliance. Other banks may approach requirements differently. They determine the amount of capital they need to do the business they seek to do. This assumes, of course, they will have access to markets to increase capital, if necessary.
(Some large banks manage capital requirements based on two guidelines: (a) minimum requirements based on Basel and bank regulation and (b) requirements based on their own calculations or perceptions of risk. They do this, in part, to capture activities that might occur in subsidiaries or entities not subject to bank regulation.)
Some finance experts argue that the greater the capital cushion, the better the bank can confront unsettling financial situations. Some, however, argue that while a capital cushion is necessary, there shouldn't be too high of a minimum requirement. Too much of a minimum cushion, they argue, stifles business growth and encourages banks to maintain balance sheets with large amounts cash reserves or liquid minimum-risk securities (U.S. Treasuries, e.g.) and not enough in consumer or corporate loans. Or it may discourage the bank from taking on incremental business.
Basel III, as before, requires banks to adjust all assets on a risk-adjusted basis and sum them up. (An unsecured corporate loan, for example, is not risk-adjusted, but collateralized loans or Treasury securities are "discounted" because of reduced risk.) Basel III requires banks to have a minimum amount of capital ("Tier 1 capital"), relative to the total risk-adjusted assets, based on new rules. The requirements will start from the existing 4% and step up eventually to 6% by 2015. Afterward, it will require an additional "buffer" of 2.5% by the end of this decade--more than doubling today's requirements by 2019.
Basel III also does something Basel I and II skipped. It will introduce limits on balance sheet leverage. In the past, a bank could have unlimited leverage if it chose, for example, to stockpile assets with risk-free Government securities. It will also penalize bank trading done away from central exchanges or risk-reducing clearing organizations.
The new requirements are outlined and quantified in painstaking detail. But what does this all mean? What are the implications to banks, bankers, and even those interested in working in financial institutions?
1. BALANCE SHEETS. Banks over the past decade have always been "balance-sheet sensitive." Basel III will make them more attuned to balance-sheet dynamics. Almost every large deal, trade, transaction, contingency, loan, or asset purchase or funding agreement will be analyzed to assess the impact on the balance sheet and capital requirements. More than before.
Before they do big deals or engage in large trading activities or expand into new businesses, banks today assess activity in "balance sheet/capital committees." They ask whether the new business is worth going onto the balance sheet or whether it will increase capital requirements.
Some impose internal balance-sheet or capital-usage penalties, hurdles or high-return requirements. The business unit receives a "penalty" cost or internal tax for using the balance sheet. Some banks call it an "asset tax." Some banks require extra "rewards" or returns for the incremental capital required. Banks have been implementing these penalties or extra requirements for the past two decades. But sometimes they overlooked these internal penalties when business surged.
With more stringent Basel III requirements, they will implement tougher requirements on business units and more "penalties" or "costs" for using capital or the balance sheet. Or they may require business units to justify harder why incremental business makes balance-sheet sense.
2. COMPUTING. Calculating assets (loans, trades, deposits, derivatives, reserves, securities, receivables, etc.) around the world, adjusting them for risk and doing so on an ongoing basis can be a systems and procedural nightmare for banks. As they had started to for Basel II, banks will devote more resources (including capital, ironically), personnel and technology to not only perform calculations and ensure compliance with requirements, but also to anticipate what they will be as business grows, changes and expands.
Over the past decade, calculating what goes onto the balance sheet for new banking products (derivatives, illiquid securities, infrequently traded securities, leveraged loans, etc.) has not been easy. Banks will seek to have a real-time system of knowing how much they are in excess of requirements at all times and in projecting the impact of new activity.
3. MARKET PERCEPTION. Banks have always managed to stockholders' expectations and will continue to do so. The market itself will have a view of banks' compliance with Basel III, even if (a) many large banks are already in compliance and (b) if the new requirements won't need to be met for years to come. Shareholders and equity markets will want to know if banks today can meet the eventual requirements and if banks have excess amounts even above the minimum for 2012 or 2015. Sending a signal to markets that a bank might have trouble meeting requirements or doesn't have excess could knock down the price of its shares. Banks know this and will manage to tomorrow's requirements, not what they need today.
4. MANAGEMENT. Especially those involved in corporate banking and trading, where activities have significant impact on balance sheets, bankers and traders will need to understand the impact of the rules more than ever. Sometimes in the past, a corporate banker, investment banker or trader relied on a compliance or regulatory colleague to worry about capital requirements. They booked trades or new loans, underwrote new securities, or accrued new activity until they were told to slow down or stop.
Going forward, they won't need to memorize the rules, but they'll need to have a keen awareness of the impact of complex business activity on the balance sheet. They will need to be more involved in bank-wide discussion of whether capital is being deployed in proper ways--to maximize returns and to ensure there is excess beyond the Basel III cushion requirement. These discussions can be complicated and political, especially if banks don't have procedures or methodology to address capital issues and requirements for new businesses.
Bankers most familiar with the guidelines and the impact of current or new business on balance sheets tend to fare well in these discussions or at least get their business points heard more clearly and logically.
They also tend to show senior management they are thinking along similar lines.
Tracy Williams
Basel III, in its most basic form, provides capital and balance-sheet rules for banks around the world. The nations who agree to follow the guidelines also agree to enact, execute and enforce regulation within their own countries that adhere in principle to Basel III.
Basel III, of course, follows Basel I and II. Basel II never really got off the ground because its deadlines had not arrived. It was never fully enforced, because the financial crisis of the past few years interrupted. If Basel I and II couldn't minimize the severe impact of the crisis among banks, the logical goes, then a stronger, more effective Basel III could. Despite recent agreement among nations to roll out Basel III, it is not without critics, who believe Basel III might not be sufficiently tough enough to keep banks from accruing too much risk in the future or who believe its guidelines don't address the broadest set of banking and financial-system issues.
Basel whatever (I, II, or III) in spirit suggests that banks can protect themselves from unforeseen risks (bad loans, bad trades, market downturns and swings, interest-rate volatility, etc.) by having an adequate capital cushion. This is not about having capital to invest in business growth, new business or new acquisitions. This is about having capital as a balance-sheet cushion, a way to soften the blow when extreme risks or market catastrophe occurs--the kind we certainly experienced the past few years. The Basel guidelines offer a way to ensure that even unexpected losses will be bearable, a way to ensure that the banks' creditors, liability-holders, depositors, and lenders will be comfortable through a crisis (and be paid if debt is due).
Some global banks successfully endured the crisis because they managed risks carefully, avoided risky businesses and trading, and minimized losses. Other banks, despite heavy losses in mortgages and corporate loans, survived it well because they had ample capital--amounts far in excess of minimum requirements. The losses didn't hurt too much.
Whatever the capital requirements, banks manage business activity and growth around them. Given a level of equity capital, banks will determine the level of business they can conduct (lending, trading, brokerage, advisory, etc.) to ensure ongoing compliance. Other banks may approach requirements differently. They determine the amount of capital they need to do the business they seek to do. This assumes, of course, they will have access to markets to increase capital, if necessary.
(Some large banks manage capital requirements based on two guidelines: (a) minimum requirements based on Basel and bank regulation and (b) requirements based on their own calculations or perceptions of risk. They do this, in part, to capture activities that might occur in subsidiaries or entities not subject to bank regulation.)
Some finance experts argue that the greater the capital cushion, the better the bank can confront unsettling financial situations. Some, however, argue that while a capital cushion is necessary, there shouldn't be too high of a minimum requirement. Too much of a minimum cushion, they argue, stifles business growth and encourages banks to maintain balance sheets with large amounts cash reserves or liquid minimum-risk securities (U.S. Treasuries, e.g.) and not enough in consumer or corporate loans. Or it may discourage the bank from taking on incremental business.
Basel III, as before, requires banks to adjust all assets on a risk-adjusted basis and sum them up. (An unsecured corporate loan, for example, is not risk-adjusted, but collateralized loans or Treasury securities are "discounted" because of reduced risk.) Basel III requires banks to have a minimum amount of capital ("Tier 1 capital"), relative to the total risk-adjusted assets, based on new rules. The requirements will start from the existing 4% and step up eventually to 6% by 2015. Afterward, it will require an additional "buffer" of 2.5% by the end of this decade--more than doubling today's requirements by 2019.
Basel III also does something Basel I and II skipped. It will introduce limits on balance sheet leverage. In the past, a bank could have unlimited leverage if it chose, for example, to stockpile assets with risk-free Government securities. It will also penalize bank trading done away from central exchanges or risk-reducing clearing organizations.
The new requirements are outlined and quantified in painstaking detail. But what does this all mean? What are the implications to banks, bankers, and even those interested in working in financial institutions?
1. BALANCE SHEETS. Banks over the past decade have always been "balance-sheet sensitive." Basel III will make them more attuned to balance-sheet dynamics. Almost every large deal, trade, transaction, contingency, loan, or asset purchase or funding agreement will be analyzed to assess the impact on the balance sheet and capital requirements. More than before.
Before they do big deals or engage in large trading activities or expand into new businesses, banks today assess activity in "balance sheet/capital committees." They ask whether the new business is worth going onto the balance sheet or whether it will increase capital requirements.
Some impose internal balance-sheet or capital-usage penalties, hurdles or high-return requirements. The business unit receives a "penalty" cost or internal tax for using the balance sheet. Some banks call it an "asset tax." Some banks require extra "rewards" or returns for the incremental capital required. Banks have been implementing these penalties or extra requirements for the past two decades. But sometimes they overlooked these internal penalties when business surged.
With more stringent Basel III requirements, they will implement tougher requirements on business units and more "penalties" or "costs" for using capital or the balance sheet. Or they may require business units to justify harder why incremental business makes balance-sheet sense.
2. COMPUTING. Calculating assets (loans, trades, deposits, derivatives, reserves, securities, receivables, etc.) around the world, adjusting them for risk and doing so on an ongoing basis can be a systems and procedural nightmare for banks. As they had started to for Basel II, banks will devote more resources (including capital, ironically), personnel and technology to not only perform calculations and ensure compliance with requirements, but also to anticipate what they will be as business grows, changes and expands.
Over the past decade, calculating what goes onto the balance sheet for new banking products (derivatives, illiquid securities, infrequently traded securities, leveraged loans, etc.) has not been easy. Banks will seek to have a real-time system of knowing how much they are in excess of requirements at all times and in projecting the impact of new activity.
3. MARKET PERCEPTION. Banks have always managed to stockholders' expectations and will continue to do so. The market itself will have a view of banks' compliance with Basel III, even if (a) many large banks are already in compliance and (b) if the new requirements won't need to be met for years to come. Shareholders and equity markets will want to know if banks today can meet the eventual requirements and if banks have excess amounts even above the minimum for 2012 or 2015. Sending a signal to markets that a bank might have trouble meeting requirements or doesn't have excess could knock down the price of its shares. Banks know this and will manage to tomorrow's requirements, not what they need today.
4. MANAGEMENT. Especially those involved in corporate banking and trading, where activities have significant impact on balance sheets, bankers and traders will need to understand the impact of the rules more than ever. Sometimes in the past, a corporate banker, investment banker or trader relied on a compliance or regulatory colleague to worry about capital requirements. They booked trades or new loans, underwrote new securities, or accrued new activity until they were told to slow down or stop.
Going forward, they won't need to memorize the rules, but they'll need to have a keen awareness of the impact of complex business activity on the balance sheet. They will need to be more involved in bank-wide discussion of whether capital is being deployed in proper ways--to maximize returns and to ensure there is excess beyond the Basel III cushion requirement. These discussions can be complicated and political, especially if banks don't have procedures or methodology to address capital issues and requirements for new businesses.
Bankers most familiar with the guidelines and the impact of current or new business on balance sheets tend to fare well in these discussions or at least get their business points heard more clearly and logically.
They also tend to show senior management they are thinking along similar lines.
Tracy Williams
Tuesday, October 5, 2010
The CFA: Where It Makes Sense
MBAs in finance will often ask about the benefits of a CFA designation. Does it make sense? Will it propel my career? Can I learn something that will give me an advantage on the job or in my career? Are more and more employers requiring it? Or if I'm in transition, will it make a difference in getting attention and gaining an offer? Is it all worth the time, effort, and costs?
There are pros and cons, advantages and disadvantages in pursuing the CFA, if you have an MBA in finance already. And within Consortium and Consortium Finance Network circles, some have debated each side.
To help all sides in the ongoing discussion, CFN hosted a webinar Oct. 5, "The MBA and the CFA," to address these questions, to explain in depth what it means to pursue the CFA and to present data that show trends, growing popularity and greater demand for those who have it. (Click here to download the recording or click here to view the slide deck.)
Charles Appeadu, Director of Sample Exam Development at the CFA Institute, was the featured presenter. "The CFA," he reminded webinar participants from across the country, "is regarded around the world." He added, "A lot of people think it's only about investments, but the content cuts across many fields. The content is deep and wide."
To prove the global reach of the CFA today, Appeadu said there are now over 99,000 people with CFA designations. About 67,000 are in the U.S., but a rapidly growing percentage of the total comes from other countries, reflecting the widespread regard for and attraction to the CFA from companies, investment funds, and financial institutions worldwide.
Appeadu said that once you have the CFA, "We (the CFA Institute) make sure you keep abreast of current knowledge and equip professionals with competence and integrity."
He presented statistics to show what those with CFAs do currently: About 22% are in portfolio managment, another 14% in securities analysis and research. About 4% are in investment banking. And 7% of CFAs globally are in C-level roles (CEO, CFO). More than a third are in positions that emphasize investment analysis, research or management in some form or another. In some of these roles, the CFA is either preferred or required.
Many CFAs, however, are in roles that may not require or may not have traditionally encouraged the CFA: consulting, risk management and accounting, for example. They have used the CFA not as a designation to meet requirements or to prove legitimacy in investment anlaysis, but as a knowledge base for other areas of finance.
Over 200,000 people are currently registered for the CFA--which means they are pursuing the CFA by preparing for one of the three levels of exams. Appeadu showed the trends of a growing number of registrants from foreign countries. (For now, most registrants are from the U.S.) Registrants have similarly expressed interest in a wide range of fields, indicating how they expect to use the CFA--from portfolio management to investment banking, corporate finance and consulting.
Webinar participants didn't hestitate to ask questions. Some wanted to know if there were scholarships to defray the costs of preparation (for the volumes of material required for study). There are, and many financial institutions support employees who express such interest. Some wanted to know whether the CFA Institute does or will ever provide an "MBA waiver," because of the overlap between MBA coursework and the CFA material. "No, but we get asked that question all the time," Appeadu said. One wanted to know if the CFA can be helpful in careers in commercial real estate.
Many wanted to know more about preparing for the three levels of exams. Appeadu said a candidate usually needs about 250 hours of studying for each exam, sometimes more. Candidates study the CFA-provided material, but they can seek and use supplementary sources. He emphasized the importance of preparing for the exams. On average for all three exams, the pass rate is about 42%, a rate that is fairly consistent among those who take it around the world and who have taken it over several decades. The same exam is given everywhere in English.
Appeadu, who has a Ph.D. in finance as well as the CFA, explained how the pass rate could be higher. Many candidates, he said, tend to be smart, well-educated and well-versed in finance and investments. They are also used to being successful and making swift progress in academics and careers. More confident than they should be, they, however, tend to underestimate the time and attention required to prepare for exams. "They sometime think they don't need to prepare as much," Appeadu said, "and then become overwhelmed."
In the exams, Level 1 focuses on knowledge. Level 2 is about analysis, and Level 3 is evaluation and synthesis. Levels 1 and 2 are multiple-choice questions (graded by computers). Level 3 includes essays graded by humans.
Registrants can take practice exams. Participants wanted to know if there is a relationship between performance on the practice exams and the real exams. There is a high correlation, but Appeadu reminded his audience there is no direct "causality," that if one does well in practice, then it doesn't mean he/she will do well on the exam.
For each exam, Appeadu explained, there is no consistent cut-off for the percentage number of questions an exam-taker must get correct. A committee of experienced experts each year determines what it thinks a "just qualified" candidate should know and how many a "just qualified" candidate should get right. That number can change from year to year, as exam questions and content change.
Because finance topics, issues and investment products evolve and get more complex, CFA content changes, too. The material covers ethics, risk management, new products, and may even cover topics such as Islamic finance.
Appeadu, who taught finance at Wisconsin-Milwaukee and Georgia State, lamented the small number of registrants and CFA charter-holders from under-represented groups. He said there is no accurate data about minorities who hold the CFA (among the 99,000) and who are in the process of taking exams (among the 200,000). But the numbers are low. "We want that to improve," he said. The CFA Institute has embarked on initiatives to spread the word by making similar presentations around the country, even speaking to undergraduates at HBCU schools.
Appeadu weighed the pros and cons of the CFA and the MBA. (The CFA Institute didn't have information on how many of the 99,000 have MBAs.) Some will ask whether an MBA should get a CFA; others will ask differently: Should one pursue the CFA and not bother with the MBA? He showed the MBA's advantages of networks, connections, contacts with professors and corporate recruiters and the broad business curriculum covering operations, marketing, accounting and policy. He showed the CFA's advantages of costs (relative to MBA tuition) and specialized knowledge and expertise.
In the end, he said he was a proponent of both. "The MBA is a degree," he said. "The CFA is a designation." In many ways, he showed, both are about a lifetime of learning, keeping up and maintaining networks and industry ties.
Tracy Williams
There are pros and cons, advantages and disadvantages in pursuing the CFA, if you have an MBA in finance already. And within Consortium and Consortium Finance Network circles, some have debated each side.
To help all sides in the ongoing discussion, CFN hosted a webinar Oct. 5, "The MBA and the CFA," to address these questions, to explain in depth what it means to pursue the CFA and to present data that show trends, growing popularity and greater demand for those who have it. (Click here to download the recording or click here to view the slide deck.)
Charles Appeadu, Director of Sample Exam Development at the CFA Institute, was the featured presenter. "The CFA," he reminded webinar participants from across the country, "is regarded around the world." He added, "A lot of people think it's only about investments, but the content cuts across many fields. The content is deep and wide."
To prove the global reach of the CFA today, Appeadu said there are now over 99,000 people with CFA designations. About 67,000 are in the U.S., but a rapidly growing percentage of the total comes from other countries, reflecting the widespread regard for and attraction to the CFA from companies, investment funds, and financial institutions worldwide.
Appeadu said that once you have the CFA, "We (the CFA Institute) make sure you keep abreast of current knowledge and equip professionals with competence and integrity."
He presented statistics to show what those with CFAs do currently: About 22% are in portfolio managment, another 14% in securities analysis and research. About 4% are in investment banking. And 7% of CFAs globally are in C-level roles (CEO, CFO). More than a third are in positions that emphasize investment analysis, research or management in some form or another. In some of these roles, the CFA is either preferred or required.
Many CFAs, however, are in roles that may not require or may not have traditionally encouraged the CFA: consulting, risk management and accounting, for example. They have used the CFA not as a designation to meet requirements or to prove legitimacy in investment anlaysis, but as a knowledge base for other areas of finance.
Over 200,000 people are currently registered for the CFA--which means they are pursuing the CFA by preparing for one of the three levels of exams. Appeadu showed the trends of a growing number of registrants from foreign countries. (For now, most registrants are from the U.S.) Registrants have similarly expressed interest in a wide range of fields, indicating how they expect to use the CFA--from portfolio management to investment banking, corporate finance and consulting.
Webinar participants didn't hestitate to ask questions. Some wanted to know if there were scholarships to defray the costs of preparation (for the volumes of material required for study). There are, and many financial institutions support employees who express such interest. Some wanted to know whether the CFA Institute does or will ever provide an "MBA waiver," because of the overlap between MBA coursework and the CFA material. "No, but we get asked that question all the time," Appeadu said. One wanted to know if the CFA can be helpful in careers in commercial real estate.
Many wanted to know more about preparing for the three levels of exams. Appeadu said a candidate usually needs about 250 hours of studying for each exam, sometimes more. Candidates study the CFA-provided material, but they can seek and use supplementary sources. He emphasized the importance of preparing for the exams. On average for all three exams, the pass rate is about 42%, a rate that is fairly consistent among those who take it around the world and who have taken it over several decades. The same exam is given everywhere in English.
Appeadu, who has a Ph.D. in finance as well as the CFA, explained how the pass rate could be higher. Many candidates, he said, tend to be smart, well-educated and well-versed in finance and investments. They are also used to being successful and making swift progress in academics and careers. More confident than they should be, they, however, tend to underestimate the time and attention required to prepare for exams. "They sometime think they don't need to prepare as much," Appeadu said, "and then become overwhelmed."
In the exams, Level 1 focuses on knowledge. Level 2 is about analysis, and Level 3 is evaluation and synthesis. Levels 1 and 2 are multiple-choice questions (graded by computers). Level 3 includes essays graded by humans.
Registrants can take practice exams. Participants wanted to know if there is a relationship between performance on the practice exams and the real exams. There is a high correlation, but Appeadu reminded his audience there is no direct "causality," that if one does well in practice, then it doesn't mean he/she will do well on the exam.
For each exam, Appeadu explained, there is no consistent cut-off for the percentage number of questions an exam-taker must get correct. A committee of experienced experts each year determines what it thinks a "just qualified" candidate should know and how many a "just qualified" candidate should get right. That number can change from year to year, as exam questions and content change.
Because finance topics, issues and investment products evolve and get more complex, CFA content changes, too. The material covers ethics, risk management, new products, and may even cover topics such as Islamic finance.
Appeadu, who taught finance at Wisconsin-Milwaukee and Georgia State, lamented the small number of registrants and CFA charter-holders from under-represented groups. He said there is no accurate data about minorities who hold the CFA (among the 99,000) and who are in the process of taking exams (among the 200,000). But the numbers are low. "We want that to improve," he said. The CFA Institute has embarked on initiatives to spread the word by making similar presentations around the country, even speaking to undergraduates at HBCU schools.
Appeadu weighed the pros and cons of the CFA and the MBA. (The CFA Institute didn't have information on how many of the 99,000 have MBAs.) Some will ask whether an MBA should get a CFA; others will ask differently: Should one pursue the CFA and not bother with the MBA? He showed the MBA's advantages of networks, connections, contacts with professors and corporate recruiters and the broad business curriculum covering operations, marketing, accounting and policy. He showed the CFA's advantages of costs (relative to MBA tuition) and specialized knowledge and expertise.
In the end, he said he was a proponent of both. "The MBA is a degree," he said. "The CFA is a designation." In many ways, he showed, both are about a lifetime of learning, keeping up and maintaining networks and industry ties.
Tracy Williams
Wednesday, September 22, 2010
MBAs: Second-Year Dilemma
Many Consortium MBAs in finance returned to business school this fall with a comfortable smile on their faces. They had productive summer internships at banks, corporations, investment funds, and private-equity firms. Many of them also had offer letters, permitting them to return after graduation in a full-time role.
But many of them have "exploding" letters, which require them to make a decision to accept or reject in a matter of weeks. If they don't, the offer is forfeited. The feel-good moments in the waning days of summer can turn suddenly into an anxiety period: Do I accept or reject this opportunity of a lifetime? Do I explore something else? Do I really like banking (or trading, investing, research or analysis)? Do I prefer to do the same at another firm? Do I give myself the well-deserved chance to shop around? Do I still look for that "dream role"? Or do I try to negotiate with the company to get more time to think this through?
Some companies apply pressure and request a final decision be made before a set date--sometimes as early as October 1. Second-year MBAs face a dilemma and must make tough decisions. Outsiders might suggest that in the current environment it's a dilemma they are fortunate to have, because they have a real opportunity and a real job at graduation.
How can second-years handle this special situation?
1. Objectives. It helps for them to understand their short-term and long-term career objectives. Many times, the offer in hand might fulfill a short-term goal (business, client, deal or trading experience, upward-sloping learning curves, extended networks, organization experience, and compensation). Does, however, the short-term goal permit you to reach the long-term goal (whatever that long-term goal could be)?
Outlining objectives and examining them thoroughly might permit the second-year to make the right decision, especially if the longer-term objective is most important.
2. Aptitude. Another approach is to understand what you want to do and what you can do. Many MBA graduates want to start in positions where they will thrive and do well. They want to launch their careers as success stories.
The second-year, therefore, may choose to delineate in detail
(a) what you want to do in that first job,
(b) what you know you can do well, and
(c) what you like to do day to day.
If all three overlap in some way, or if an MBA in finance wants to, can do, and will like doing the job, then it's likely he or she will do well starting out. When the offer presents a role where all three come together, then the MBA can't go wrong in accepting the job.
If the offer doesn't permit the three to intersect in a substantial way, then it might make sense to explore other opportunities.
It's not as easy as it appears here, because often you know you can do the job and wouldn't mind doing it, but it may be something you dislike or can't tolerate. But it may be the role that is a convenient stepping stone to a long-term objective. If the long-term goal is important and if you can do the job well, then you might rationalize accepting the offer.
These kinds of self-assessments can help guide in final decisions.
3. Options, Opportunities. Second-years in these times must survey what the opportunities and options are in finance. Uncertainty in markets and in the recovery will limit options. So they must be sincere with themselves about the implications of turning down an offer that's in hand.
Banks and other financial institutions turned up the gears in hiring in early 2010. There are hints now, however, they may slow down a bit, not because business has evaporated, but because they certainly will be cautious about over-hiring.
Second-years who want to explore options and opportunities are in the best environment to do so--on campus, where banks and corporations will continue to touch bases with business schools even if they may not be recruiting aggressively.
4. Mentors, Alumni, and Networks. Second-years would benefit from discussing their situations with others who have been through the same. They'll learn how others grasped and approached the decision and understand factors in those decisions. More experienced mentors and alumni will even acknowledge whether their decisions were wrong or bad and contemplate what they might have done, if they had the same decision today.
The second-year who still has doubts about the summer experience and is frustrated by an impending "explosion" from an offer might still ask for an extension from the hiring company. There are rules, but companies bend them. A follow-up discussion with the company might give the second-year a chance to see the company in a different way, speak to others to get more details about the position, or negotiate a move to a more satisfying or vibrant group.
At some point, decisions must be made. Most second-years will agree these decisions are tough (because they often involve relocation and personal commitment of about two years to the role), but this one may not be the toughest of all. Deciding whether to attend business school and choosing which business school might have been tougher.
Tracy Williams
But many of them have "exploding" letters, which require them to make a decision to accept or reject in a matter of weeks. If they don't, the offer is forfeited. The feel-good moments in the waning days of summer can turn suddenly into an anxiety period: Do I accept or reject this opportunity of a lifetime? Do I explore something else? Do I really like banking (or trading, investing, research or analysis)? Do I prefer to do the same at another firm? Do I give myself the well-deserved chance to shop around? Do I still look for that "dream role"? Or do I try to negotiate with the company to get more time to think this through?
Some companies apply pressure and request a final decision be made before a set date--sometimes as early as October 1. Second-year MBAs face a dilemma and must make tough decisions. Outsiders might suggest that in the current environment it's a dilemma they are fortunate to have, because they have a real opportunity and a real job at graduation.
How can second-years handle this special situation?
1. Objectives. It helps for them to understand their short-term and long-term career objectives. Many times, the offer in hand might fulfill a short-term goal (business, client, deal or trading experience, upward-sloping learning curves, extended networks, organization experience, and compensation). Does, however, the short-term goal permit you to reach the long-term goal (whatever that long-term goal could be)?
Outlining objectives and examining them thoroughly might permit the second-year to make the right decision, especially if the longer-term objective is most important.
2. Aptitude. Another approach is to understand what you want to do and what you can do. Many MBA graduates want to start in positions where they will thrive and do well. They want to launch their careers as success stories.
The second-year, therefore, may choose to delineate in detail
(a) what you want to do in that first job,
(b) what you know you can do well, and
(c) what you like to do day to day.
If all three overlap in some way, or if an MBA in finance wants to, can do, and will like doing the job, then it's likely he or she will do well starting out. When the offer presents a role where all three come together, then the MBA can't go wrong in accepting the job.
If the offer doesn't permit the three to intersect in a substantial way, then it might make sense to explore other opportunities.
It's not as easy as it appears here, because often you know you can do the job and wouldn't mind doing it, but it may be something you dislike or can't tolerate. But it may be the role that is a convenient stepping stone to a long-term objective. If the long-term goal is important and if you can do the job well, then you might rationalize accepting the offer.
These kinds of self-assessments can help guide in final decisions.
3. Options, Opportunities. Second-years in these times must survey what the opportunities and options are in finance. Uncertainty in markets and in the recovery will limit options. So they must be sincere with themselves about the implications of turning down an offer that's in hand.
Banks and other financial institutions turned up the gears in hiring in early 2010. There are hints now, however, they may slow down a bit, not because business has evaporated, but because they certainly will be cautious about over-hiring.
Second-years who want to explore options and opportunities are in the best environment to do so--on campus, where banks and corporations will continue to touch bases with business schools even if they may not be recruiting aggressively.
4. Mentors, Alumni, and Networks. Second-years would benefit from discussing their situations with others who have been through the same. They'll learn how others grasped and approached the decision and understand factors in those decisions. More experienced mentors and alumni will even acknowledge whether their decisions were wrong or bad and contemplate what they might have done, if they had the same decision today.
The second-year who still has doubts about the summer experience and is frustrated by an impending "explosion" from an offer might still ask for an extension from the hiring company. There are rules, but companies bend them. A follow-up discussion with the company might give the second-year a chance to see the company in a different way, speak to others to get more details about the position, or negotiate a move to a more satisfying or vibrant group.
At some point, decisions must be made. Most second-years will agree these decisions are tough (because they often involve relocation and personal commitment of about two years to the role), but this one may not be the toughest of all. Deciding whether to attend business school and choosing which business school might have been tougher.
Tracy Williams
Thursday, September 16, 2010
The MBA and the CFA: Part III
MBA students and graduates in finance, especially in current times when they seek an advantage of some kind, have wrestled with whether or not to pursue the CFA designation. They ask themselves: Is it worth the time, effort, costs, and uncertainty? Can it be used to propel a career? Some ask: Is there overlap with finance courses in business school? And many are now wondering: Does it make a difference in a career path? Or in pursuing a specific job spot?The Consortium Finance Network is helping to respond to some of these questions by sponsoring a webinar, "The MBA and the CFA," October 5 from 5-6:30 p.m.
The webinar will raise these same questions and address topics related to the CFA. Most MBAs know there are three levels of exams, but what do they entail? How much preparation is necessary? How can I prepare for the CFA while in a demanding job? What topics are covered? How can an MBA student choose certain courses in business school that will help prepare for the CFA? In investment management roles, do I really need the CFA to succeed?
Charles Appeadu (above), Director of Sample Exam Development at the CFA Institute, will make a presentation, followed by questions and commentary. Appeadu was a finance professor at the Univ. Wisconsin-Milwaukee and Georgia State Univ. before joining the Institute in Charlottesville, Va. He has a Ph.D. in finance from the Univ. Washington. Not only does he have a CFA, he also has certifications in FRM (financial risk management) and CAIA (alternative investments).
Appeadu will address some of these questions. He will describe what the CFA covers and what business schools don't and tell about other topics the CFA covers in the wake of the financial crisis.
Some institutions (funds, banks or investment managers) actually require the CFA for some spots. Others are encouraging it, even if it doesn't have a direct connection to the role. Others find the CFA gives them a knowledge advantage ("oneupmanship") in traditional banking roles.
CFN members, Consortium students and alumni and others interested in finance, investments and the lure of the CFA should join the webinar.
Tracy Williams
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For more on the MBA and the CFA, see:
http://consortiumfinancenetwork.blogspot.com/2010/05/mba-and-cfa.html
http://consortiumfinancenetwork.blogspot.com/2010/06/mba-and-cfa-part-ii.html
Register on the Consortium Finance Network Linkedin: www.linkedin.com
Finance Websites: Keeping Up, Sharing Knowledge
In finance, much of success is not just about who you know and where you work--although that surely contributes to much of it. Success (if measured by progress, advancement and promotions) is also about what you know, what you are learning, and how you are keeping up: Are you aware of trends, innovations and new products? Do you understand different perspectives or insights regarding markets, corporate finance or corporate industries? Are you up to date on regulatory issues, financial reform, or global expansion? Do you have an informed view of whether we are in a period of recovery or slipping back into a recession?
That's where informative, carefully prepared blogs and websites can be useful. And that's where a few Consortium students and alumni have stepped up.
Consortium student LaMarr Taylor announced this week his new website focusing attention on relevant issues in private wealth management (PWM). PWM is a popular career choice for many MBA students. For many financial institutions, it's a targeted area for growth in the next few years.
Taylor, a second-year student at Indiana, is set to work full-time next year in PWM at a major bank. In the meantime, he has assembled a website (http://www.lamarrtaylor.com/) devoted to addressing, reviewing and synthesizing topics in PWM. Viewers to the site get a synopsis of all issues relevant to bankers, investment managers, and financial advisers.
The site, for example, currently covers such issues as toxic assets, Basel III, and the possibility of double-dip recession--topics professionals in financial consulting ought to be familiar with or at least have a framed understanding. Taylor also summarizes a conference he attended, called InvestIndiana, which featured presentations of public companies based in Indiana or with a significant impact or presence there.
Taylor has an undergraduate degree in electrical engineering, and at Indiana, he is a member of the Investment Management Academy.
He is one of a handful of Consortium alumni and students who decided it would be worthwhile to aggregate information and tackle issues in particular finance areas.
Ken Alozie, a Michigan Consortium alumnus, continues with his site http://www.bankingorbust.com/, aimed at helping analysts and associates thrive (or survive?) at investment banks or in corporate-finance roles. The site offers a primer in all important corporate finance topics, provides updates on technical topics and current issues, and in some ways is a refresher for even the most experienced finance people.
The site helps new associates use b-school finance to be effective analysts or financial modelers in mergers & acquisition or leveraged finance. Now over 18 months old, the site even dares to explain the problems from subprime-mortgage securitization or the intricacies of credit-default swaps.
After Michigan, Ken earned an M.S. in finance and is now involved in private equity.
Consortium alumnus Rob Wilson provides regular updates on money management on his site http://www.robwilson.tv/. Wilson, who is a graduate of Carnegie Mellon, appears often on local television in Pittsburgh, offering advice on investments and retirement planning. Wilson also advises many professional athletes and entertainers.
In March, he sponsored his own version of March Madness by featuring a stock-picking contest similar to the NCAA basketball brackets.
Recent Indiana-Consortium alumnus Felicia Enuha is using her blog to chronicle her first year on the job after getting an MBA: http://www.thefarembalife.com/. A recent posting offers 10 helpful hints how to be effective in the midst of networks at the National Black MBA Conference.
Other postings describe the transition from business school to work life and her thoughts about how she'll take steps to reach her long-term career goals.
The advantage of sites like these and others is that while informing others (peers, colleagues, students and other graduates), they offer a special perspective, a Consortium view.
Tracy Williams
That's where informative, carefully prepared blogs and websites can be useful. And that's where a few Consortium students and alumni have stepped up.
Consortium student LaMarr Taylor announced this week his new website focusing attention on relevant issues in private wealth management (PWM). PWM is a popular career choice for many MBA students. For many financial institutions, it's a targeted area for growth in the next few years.
Taylor, a second-year student at Indiana, is set to work full-time next year in PWM at a major bank. In the meantime, he has assembled a website (http://www.lamarrtaylor.com/) devoted to addressing, reviewing and synthesizing topics in PWM. Viewers to the site get a synopsis of all issues relevant to bankers, investment managers, and financial advisers.
The site, for example, currently covers such issues as toxic assets, Basel III, and the possibility of double-dip recession--topics professionals in financial consulting ought to be familiar with or at least have a framed understanding. Taylor also summarizes a conference he attended, called InvestIndiana, which featured presentations of public companies based in Indiana or with a significant impact or presence there.
Taylor has an undergraduate degree in electrical engineering, and at Indiana, he is a member of the Investment Management Academy.
He is one of a handful of Consortium alumni and students who decided it would be worthwhile to aggregate information and tackle issues in particular finance areas.
Ken Alozie, a Michigan Consortium alumnus, continues with his site http://www.bankingorbust.com/, aimed at helping analysts and associates thrive (or survive?) at investment banks or in corporate-finance roles. The site offers a primer in all important corporate finance topics, provides updates on technical topics and current issues, and in some ways is a refresher for even the most experienced finance people.
The site helps new associates use b-school finance to be effective analysts or financial modelers in mergers & acquisition or leveraged finance. Now over 18 months old, the site even dares to explain the problems from subprime-mortgage securitization or the intricacies of credit-default swaps.
After Michigan, Ken earned an M.S. in finance and is now involved in private equity.
Consortium alumnus Rob Wilson provides regular updates on money management on his site http://www.robwilson.tv/. Wilson, who is a graduate of Carnegie Mellon, appears often on local television in Pittsburgh, offering advice on investments and retirement planning. Wilson also advises many professional athletes and entertainers.
In March, he sponsored his own version of March Madness by featuring a stock-picking contest similar to the NCAA basketball brackets.
Recent Indiana-Consortium alumnus Felicia Enuha is using her blog to chronicle her first year on the job after getting an MBA: http://www.thefarembalife.com/. A recent posting offers 10 helpful hints how to be effective in the midst of networks at the National Black MBA Conference.
Other postings describe the transition from business school to work life and her thoughts about how she'll take steps to reach her long-term career goals.
The advantage of sites like these and others is that while informing others (peers, colleagues, students and other graduates), they offer a special perspective, a Consortium view.
Tracy Williams
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