Given the number of emails I’ve gotten from discouraged graduates, I think it’s a good time to revisit the question of getting a job in finance.
The usual question is more like, “will the CFA charter get me a job?” Of course the answer is NO, it will not GET you a job. Having the charter or working towards completion will help but you will still need to work for that offer letter.
Sad but true, you have to work just to get a job to go to work. Fortunately, no job is without a standard operating procedure.
Decide what you really want
This is a big one and probably the most neglected among job hunters. So you want a job in finance? Great, what part of finance, what role? You need to figure out what specifically you want to do. You are going to need to do a lot of footwork and cannot do it for every role and every company.
Do your homework
Now that you have an idea of what you want to do, you can start to focus. The internet is a good tool but talking to people will pay unexpected dividends. Every time you talk to someone about what you want and what you can bring to an employer, you will make connections. Those people will remember you the next time they hear about an opening.
Talk to someone from the local chamber of commerce, your local CFA society or another business organization about the local companies in the industry. Phone calls are ok but in-person is 100 times better. Make the time to make it personal.
Once you have a good list of companies, go to the website to look for open positions. Even if something is available, your work isn’t over just by filling out an application. Your next assignment is finding out about the company and the specific department where you want to work. What is the company’s market? Are you a key demographic or can provide insight into that market? Has the company tried expanding into any other industry or vertically? What can you bring to the table?
Who do you know that knows someone that works in the department? If everyone on earth is connected to Kevin Bacon by just six degrees of separation, then surely you have a connection to someone in the department. Do people that work in the department have a certain background? Do they usually come from accounting, do they come from other firms in the same role, are they generally fresh out of college? How are you alike and dissimilar? What can you bring to the table?
Stand out from the competition
There could be upwards of 100 applicants for the position, 10 initial interviews and 3-5 second interviews. How do you stand out from the rest? Your prior work, making those connections and researching the company will pay off but you still need to work on it.
By now, you should have a good idea of what you want to do and what people in the department are doing on a daily basis. You need to show HR and management that you can do that. Do they make a lot of presentations (i.e. sell side)? Then you better have a presentation ready. Sure, they may not have a computer set up for powerpoint during the interview but they will appreciate that you took the time and can look at the printed slides as you talk through it.
They say dress for the job you want. What about doing the job you want? Want to be an equity analyst? Work through a financial model and put together a full equity report to take to the interview. First, it will show that you are motivated and willing to work to get the job. Second, it is going to help you understand the job better and the Q&A will go much more smoothly.
It isn’t an entirely easy process but starting in a position higher than mailroom clerk will be your reward. Stick with it and be prepared for a lot of rejection and non-responses. If nothing else, while you wait you’ll have plenty of time to study for the CFA.
‘til next time, happy job hunting.
Joseph Hogue, CFA
I know 99% of you are looking at the chapter subject, quantitative concepts, and are shuddering right now. MATH! Ugh!
As a reborn numbers junkie myself, I can understand your apprehension. I always hated math in school but have grown to really enjoy it since studying for the CFA exams. Math is one of the only true absolutes in life. In all the mystery and chaos of our daily gamble, you know that 2 +2 will always equal 4. I kinda like that assurety.
Try to open yourself to the material and embrace it as a way to make yourself a better professional in an area where others will surely neglect. The section is important for the Claritas Investment Certificate and is one of the five chapters in Module 3 that account for 20% of your exam score.
Time Value of Money
There are two ideas at play here. First, everyone would rather have money now rather than later so most people want some kind of return to sacrifice current spending power. Second, the timing of when you receive the money is important to how much value it has now.
There is a lot of definition material here but it is all inter-related so try to get the overall concept first and everything should fall into place. Understand the difference between simple interest and compound interest.
Compound interest is a very important concept and just means that you will receive interest in the future for interest payments you receive now so it is worth progressively more money. The calculation is super easy on most calculators. Simply type in the interest rate (1+rate) and hit the yx key then the number of periods to compound and times the initial dollar amount.
Once you have the difference between simple and compound interest, the definitions for Annual Percentage Rate (APR) and Effective Annual Rate (EAR) become clear. Remember, the EAR is effectively the money you will be paying or receiving since it is the more accurate compounded rate.
Net Present Value is probably the most important concept in finance. An investor/financier needs to know how much an asset is worth in today’s dollars to be able to make funding decisions. As with any net figure, it is the difference between the total present value and the initial cost. Be sure you understand the process, i.e. why each year’s cash flow is discounted by a rate to find the present value, but you can do this calculation quickly and easily on the calculator.
Annuities and Mortgages are conceptually the same thing. The only difference is who receives the money and makes payments. In mortgages, you receive money to buy a house and make regular payments in the future. In an annuity, the bank receives the initial payment and promises to make payments to you in the future. Really the only difference is that annuities may be structured to pay off for an indefinite period.
Each mortgage payment includes a portion of interest and a repayment of the initial loan, so eventually the amount is paid off.
I think a lot of the terms here are unnecessary jargon. “Data set” just means the numbers you’ve collected for your analysis. Much of the chapter is like this but there are a few very important words and concepts.
Central tendency is just the best number that describes a group of numbers. Understand the difference between the “mean or arithmetic mean” and the “geometric mean.” The arithmetic mean is the simple way you learned in school, adding everything up and dividing by the number of occurences. Geometric mean is the average of the compounded return for each occurrence.
Median and mode are very important but pretty easy concepts. Remember, median is the middle number (or an average of the two middle numbers) while the mode is the number that happens most often.
Standard deviation and variance are extremely important concepts in investments. They are used to measure the volatility in price or returns and so imply the risk in an investment. The formula can be tough for math newbies so hang in there and you’ll get it. Just remember that standard deviation is the variability around the average. If you know the average (return) and you know by how much the actual (return) might differ from the average, then you can make a better investment decision.
The normal distribution is one of the cool ways that math relates to life and other areas of science. It just happens (ok there’s probably a more complicated reason than, “it just happens”) that events in nature fall around a ‘bell-shaped’ curve. There is the average, where events tend to occur by definition, and everything else falls around the average in a nice pattern. This pattern can be skewed left or right or can be a little fatter or thinner, but it is generally pretty much the same.
Correlation is another big one for investments and really just means the tendency for two (assets, variables, etc.) to move in the same or opposite directions. The measurement ranges from -1 to +1. For example, if the share price of Apple always goes up when the share price of Intel goes up, then they would be perfectly correlated (+1). If shares of Apple always went down when shares of Intel went up, then they would be perfectly negatively correlated (-1). If there really didn’t appear to be a pattern between the two share prices, then they would not be correlated (0). Few things have correlations of +1 or -1 but instead are somewhere in between.
The importance of correlation is that you can put stocks in a portfolio and the portfolio will have less risk than the two individual stocks. This is because when not all stocks will be increasing or decreasing at the same time so you’re overall return will be smoother.
The limited material in the chapter really isn’t so tough. Even if you have always avoided math and statistics, you are probably familiar with the concepts. Again, try to embrace the material as a new challenge and a road to being a strong asset to any employer.
‘til next time, happy studyin’
Joseph Hogue, CFA
Reading through the LinkedIn group lately, someone was asking about the difficulty of the CFA Level 1 exam and how it related to another professional exam. A couple of candidates commented how tough the material was and how much there was of it.
I just had to smile.
Looking back, especially on the first exam, I agree completely with comments on how broad the material is and how daunting it can be for new CFA candidates. It is hard to say that difficulty of the material in the first exam really isn’t really that tough because I had come from a background in finance and several years of working in investments and accounting by the time I took the test. For those making their first steps into finance and asset management, I can imagine the books read like another language.
The challenge of the first exam, even for those with backgrounds in the industry, is the sheer volume of material you need to master. Forget going to the gym, you’re going to get all the exercise you need carrying around those books. I took full schedules every year of my undergrad and I don’t think my curriculum for any one semester (maybe two) had the page length of the first CFA exam.
We all know how it is to drink from a garden hose. If the water is turned up to full stream, it’s a little challenging. Now imagine trying to drink from a fire hose and you’ve got an idea about the difficulty of the level 1 exam.
Don’t try to catch all the water at once
Just like drinking from a fire hose, don’t expect to get all the material on your first read through the curriculum. Most brains just do not work like that. You are going to remember maybe 30% or so after your first read through the curriculum, and that is if you work the practice problems. If you just plan on reading through and not working any problems, you may remember even less.
To really master the curriculum, you need to keep going back to the fire hose and getting the water you missed. I made a point to hit the curriculum at least 5-6 times for each exam. I would first read through the books, then work my way through study guides and videos. Then I would work through the official books one more time making flash cards for the difficult topics. I worked practice problems and test banks through each round of reading to make sure I was progressively picking up more of the material. This kind of plan takes a little longer but you’ll go to the exam fully relaxed and confident that you will succeed.
Linked here is a graphic published by the CFA Institute showing the exam topic area weights across the three tests. After just a brief glance, it becomes extremely clear what topics are most important for passing the exams. Don’t misunderstand, you need every point you can get and cannot afford to completely ignore any one subject but with limited time to study you need to focus on the topics that mean the most points.
Use this information to develop a study plan. Let’s say you are doing well on practice exams except for two topics, Alternative Investments and Financial Reporting. Which do you think you need to spend more time on? Answering 60% of the Alt Investment questions correctly means you only missed about 1% of the total exam points. Answering the same percentage correctly on FR&A means you just lost 8% off your exam score!
Put the two ideas together and you’ve got a good chance at passing the exams. Read through the curriculum once, working the practice problems, then use study guides to work through the material quickly once more. After that you should have a good idea about which topics are giving you the most problems. From there, focus on the high point topic areas. Keeping working the practice problems and test banks for the entire curriculum so you don’t slip too much on the lower-point topics.
Just two months left to the December exam and seven months to the June exams. Good luck.
‘til next time, happy studyin’
Joseph Hogue, CFA
A recent post on the LinkedIn forum is asking how people with children are finding time to study for the exams. We can all relate to the time constraint to some degree but I have a ton of respect for the candidates able to do it while caring for young children.
I worked a full-time job throughout my studies and was married while studying for the third exam but never had to juggle studying with the full-time job of raising a young child.
So I researched some time saving tips online and came up with this list…
1) Is it a coincidence an enlistment in the military and the average time to pass all four CFA exams is four years? I say it’s time to teach the kids the importance of serving their country. Never too young!
2) The average person spends more than 23,000 hours washing clothes and over 300,000 hours getting dressed! Save the time, go naked!
3) Instead of calling your name while making love, ask your lover to call out formulas from the curriculum!
Real Ways to Find Time
Joking aside, there are ways to find time to study even with a full work schedule and kids. It really comes down to time management. We all have to do it, you will just need to sacrifice more and manage your time more efficiently if you have more commitments.
1) Start earlier – You know that it takes an average of 300 hours of studying to accumulate the knowledge to pass any given level of the CFA exams. This doesn’t change whether you have four hours a week or 40 hours a week to study. There are approximately 36 weeks left to the June 2014 exams. That means about eight hours a week studying, a fairly manageable goal even with kids.
2) Take longer – Everyone is laser-focused on passing the exams each year but there is nothing that says you cannot take two years per exam. The curriculum doesn’t really change much from year to year. You should be able to find a recent year’s curriculum through another candidate, the local CFA society or the library. That allows you to study for free until you are confident you can register for and pass the next exam. Just make sure you check the readings in the older curriculum against the Institute’s current year curriculum.
3) Who needs TV anyway – It’s not only TV but we all have little things that we spend time on that could easily be sacrificed. Budget your time carefully and you should be able to find a couple of hours per week.
4) Your support system is everything – Friends and family are a great resource for support and help with time. Can they help watch the kids a couple of hours per week? Can they help run some errands that might save you a couple of hours? Don’t be afraid to ask, they care about you and want you to succeed. That’s why they are your friends.
You are taking the exams for a reason. You are highly motivated and ambitious. Don’t let the lack of a few hours per week keep you from achieving your goals.
‘til next time, happy studyin’
Joseph Hogue, CFA
The material on financial statements is extremely important on the CFA exams and used on a daily basis by professionals in the industry. The section is just as important for the Claritas Investment Certificate and is one of the five chapters in Module 3 that account for 20% of your exam score.
The intro material is fairly general. It looks like a lot of Claritas revolves around understanding the various participants in the capital markets and their roles. Remember this as you read through the curriculum. You are not expected to know the details of what every participant does but just understand their general role and reasons.
Participants and uses of financial statements include: management, employees, investors, tax authorities and investment analysts.
- Besides a summary of past performance, financial statements also provide information that can be used to forecast performance
Statements follow one of two accounting standards:
- International Financial Reporting Standards (IFRS)
- Established by the International Accounting Standards Board (IASB)
- Generally Accepted Accounting Principles
- Used by most U.S. based publicly-traded companies
Though there are standards and rules that must be followed, management still has flexibility in how they report many items on the statements. It is for this reason that so much time is spent analyzing the statements to develop a clear picture of the company’s future.
The statements must be audited by an independent firm, which provides one of three opinions on the fairness of reporting **not a judgment on the company’s performance or stability
This section gets fairly deep into some accounting concepts. As with the other technical portions of the curriculum, I would recommend that you get the bigger picture first. Understand the three basic financial statements, what each shows and their interrelationship first. Only after you’ve got this then start worrying about smaller details like the accounting treatment for individual line items. You won’t get every point on the exam, but you will get the big ideas to get you a passing score.
The Balance Sheet shows all the resources (assets) owned by the company and the sources of financing (liabilities and equity). One of the biggest differences with the other statements is that the balance sheet shows everything as of a specific point in time, the last day of the fiscal year or quarter.
Assets are either current (short-term, less than a year) or long-term (things like property, plant and equipment used for many years)
Liabilities are also either current (must be paid within the year) or long-term (usually loans with many years left to pay)
Shareholder equity is the portion of profits that have not been paid out and still remain to the owners of the company
The Income Statement shows the company’s sales and profits that occurred over the entire period. For starters, understand the following keywords and their place in the statement: Revenue (sales) minus operating expenses equals EBIT minus interest and taxes equals net income. Net income from the statement is used as the first line item to construct the statement of cash flows.
The Statement of Cash Flows shows the cash receipts and uses of cash that occurred over the entire period. The statement is extremely useful because it shows actual cash movements rather than following the accrual method of accounting used in other statements.
The statement is broken into three segments: cash flows from operating activities (cash generated from daily business), cash flows from investing (cash from buying or selling long-term assets) and cash flows from financing activities (cash from borrowing or repaying money). The change in cash from these three segments ends up on the Cash balance at the top of the Balance Sheet.
Although not really another statement, the Notes to the Financial Statements are also very important and provide some key assumptions and details used in the other three statements.
Financial Statement Analysis
Ratios play a big part of analysis because they are fairly simple to understand and can help to compare companies.
Liquidity ratios measure the company’s ability to pay their short-term liabilities (loans)
- Current ratio (current assets/current liabilities)
- Quick ratio [(current assets – inventories)/current liabilities]
Profitability ratios measure the overall performance and efficiency of the company
- Net profit margin (net income/revenue)
- Operating margin ( operating income/revenue)
- Return on assets (net income/ total assets)
Financing ratios measure the amount of debt and the ability to meet loan obligations
- Debt-to-equity (debt/equity)
Return measures measure the amount earned for owners
- Return on Equity (net income/equity) also (net profit margin*asset turnover*financial leverage)
Market value ratios measure the price of the stock against another metric
- Price-to-earnings (price/earnings per share)
- Price-to-book (price/ company book value)
If the math scares you a little (x/y), just try thinking in terms of how much of x does the company have to cover y or how much of x have they been able to earn for their amount of y.
It’s a detailed chapter and probably more than many were expecting. Keep at it and do your best. Certificate or no, this information is extremely valuable and used every day in your industry. Knowing it will only make you better at your career and an asset to your employer.
‘til next time, happy studyin’
Joseph Hogue, CFA
“I got that email that every candidate waits for saying that I passed the Level 3 exam and was able to submit my application for membership to the CFA Institute and receive my charter. I was so happy I spent the next hour calling and emailing friends and family. My happiness was quickly turned to pain and disappointment a couple of months later when my application was denied!”
This is an excerpt from an email I received last year in December and is pretty typical of ones I get each year. The problem is almost always the same, lack of approved work experience.
Before you receive your charter and are approved for Institute membership, you must:
- Pass all three exams
- Have two sponsors fill out the Institute’s sponsorship application, one supervisor and one member of the local CFA society
- Meet the requirements for 48 months of ‘qualifying’ work experience
- Pay member dues and sign the Professional Conduct Statement
The requirement for 48 months of ‘qualifying’ work experience catches more candidates than you would think. The Institute fairly narrowly defines ‘qualified’ and will deny your application if your experience does not fit the mold.
‘Qualifying’ Work Experience
Below is the guidance from the Institute on what is considered ‘qualifying’ work experience.
- Evaluating or applying financial, economic, and/or statistical data as part of the investment decision-making process involving securities or similar investments (e.g., publicly traded and privately placed stocks, bonds, and mortgages and their derivatives; commodity-based derivatives and mutual funds; and other investment assets, such as real estate and commodities, if these are held as part of a diversified, securities-oriented investment portfolio).
- Engaged in responsibilities and/or producing work or work product that informs or adds value to those decisions.
- Supervising, directly or indirectly, persons who practice these activities.
- Teaching such activities.
The problem is that the definition provided is fairly broad while the actual criteria used in judging applications is more narrow.
In fact, my first application for membership in 2011 was denied for lack of experience. I was denied credit for my three years of work as a financial analyst since my role in the investment decision-making process was not clear.
Follow the Learning Outcome Statements
First, if you are a level one or level two candidate then you’re in luck and still have a few years to get the experience you need. If you are working in a front-office position and you’re job is directly involved in the decision-making process, you’re also in luck and shouldn’t have a problem.
If you do receive that disappointing letter, you can always provide more detail on your job duties. Focus on the learning outcome statements, especially those in the level 3 exam, and how they fit with your job duties. Every company makes investments of resources in projects and most personnel help in the decision-making process in some way. You just have to find your place in the process. After providing more detail on my work experience, including a rewrite of duties more closely related to the exam LOS, I was approved for membership and received my charter.
If you are not approved for membership even after re-applying, it’s not the end of the world. You will be given affiliate member status and will enjoy all the benefits of Institute membership but will not be able to vote. Leverage your ‘charter pending’ status into a job where your duties directly affect the decision-making process and reapply when you meet the 48 months requirement.
‘til next time, countin’ the days to start the 2014 study season
Joseph Hogue, CFA
The changes to the 2014 CFA Level 2 exam are not as extensive as we’ve seen in the past but there are a few important differences. There are seven new readings and a few ones that have been dropped. All the new readings will have new LOS, though they may be similar to past LOS.
If you’re new to the exam, I wouldn’t change my study schedule too much for the curriculum changes but make sure you have a good grasp of the material. Those repeating the exam will want to focus on the new material since most of the old material will be relatively fresh in your mind.
The Standards and ethics material is the same next year as it has been in the past.
The material in quantitative methods (Study Session 3) and economics (Study Session 4) are basically the same, though some of the LOS have been split or combined but this won’t change the ideas or formulas that you need to know.
Study Session 6, Financial Reporting and Analysis, includes the same three readings (19-21) but they have been updated from last year. LOS 21b and 21h-j have been added and require a more detailed understanding of currency transaction exposure and multinational accounting.
Study Session 8, corporate finance, has not changed though some of the LOS have been split, combined or have slightly different wording. Again, these changes really do not affect what you need to study or understand. Focus on the bigger changes.
The Lessons we Learn, reading 22; Study Session 7 has also been updated
Study Session 11, Equity Valuation (Industry and Company Analysis) has seen the most changes with the addition of two new readings; Reading 33, “Your Strategy Needs a Strategy,” and Reading 34, “Industry and Company Analysis.”
The two new readings strike me as very similar to the Five Forces reading, more management-related than the rest of the curriculum. As an analyst, you need to be able to understand business models and management perspective but a lot of this stuff always seemed too theoretical to me. Easy to remember though.
Reading 44, “A Primer on Commodity Investing,” has been added to Study Session 13, Alternative Investments. The material is fairly close to that in the commodities reading that was dropped from the Level 1 curriculum this year. This happens often where the Institute moves the focus of material from one year to another. The LOS in the new reading look fairly basic and it shouldn’t be a problem for candidates.
Fundamentals of Credit Analysis (Reading 42, 2013) in the Fixed Income material has been replaced by Reading 45, Credit Analysis Models in Study Session 14. While the LOS have changed, they appear to cover mostly the same ideas and concepts. If anything, the new LOS are a bit more quantitatively focused.
Credit Derivatives: An Overview (Reading 53, 2013) has been replaced by Reading 56, Credit Default Swaps in Study Session 15. The new material actually looks a little easier because it is more narrowly focused on Swaps rather than all credit derivatives.
Study Session 18, Portfolio Management has also seen some pretty big changes. The Theory of Active Portfolio Management (Reading 55, 2013) has been dropped and two new readings have been added; Reading 58, “Residual Risk and Return: The Information Ratio” and Reading 59, “The Fundamental Law of Active Management.” Both of these new readings turn the focus to a quantitative approach to active management from last year’s focus on theory.
That concludes our review of the changes to the three exams for the 2014 season. We’ve still got a while before you need to start worrying about a study schedule so we’ll probably cover some miscellaneous topics or answer some questions in the coming weeks. Let me know if there’s anything you want covered.
‘til next time, take a break!
Joseph Hogue, CFA