ALLEN ARAVINDAN,CFA

I have been asked by students “Which is better: CFA or Financial modelling? “so many times. And while directly there is nothing to really compare because CFA is a charter professional qualification while Financial modelling is a skill. However, If I slightly try put the question in context, then may be what you really want to know, is if CFA or financial modeling is the right option for you today.

So let me address this from the industry experience of working in this field for the last 15 years.

Introduction

Brief overview of CFA and Financial Modeling

Let me clearly distinguish the objective and brief details about both;

• CFA or chartered financial analyst is an investment management qualification. Much like any other qualifications but of courses reputed.
• Financial modelling on the other hand is a skill required in tasks like investment analysis, financial analysis and even risk analysis.
• CFA has a wide diverse coverage of topics like financial statement analysis, equity valuation, corporate finance. In total it covers 10 broad topic areas.
• On the other hand financial modelling is a framework. Basically it teaches how to solve a decision making problem and in short how to build financial Models. CFA program doesn’t teach financial modeling.

Understanding CFA

CFA or chartered financial analyst is a professional qualification which you can pursue right after bachelor s degree or while In the final year of graduation.

Purpose Of CFA

CFA should be pursued by candidates when they are pre decided that they want to pursue a career in the investment industry. For example; CFA level 1 curriculum covers topics which are applicable for;

• Equity Research or investment banking
• Credit finance
• Wealth management
• Corporate Finance or FP&A

If you are already having a qualification in finance, then I would suggest to pursue CF only after getting into any of the above roles.

Detailed curriculum and exam structure

The CFA program is divided across three levels

• Level 1, Level 2 & 3
• It has 10 major subjects which remain the same across levels
• The exam is MCQ based in level 1 & level 2. However level 3 is essay based.
• Also the exam is conducted in CBT Testing method which is conducted 4 times a year.

Career opportunities and benefits

The cfa program is a renowned and well respected professional qualification which remains as a benchmark for investment finance careers. In India specifically, there are wide range opportunities that you can gain by pursuing even CFA level 1 exam. After completion of CFA, you can work in the field of;

• Risk management
• Hedge fund industry
• Investment strategy
• Equity investment analysis

Real-world applications of CFA knowledge

You might be interested in knowing that unlike many university level qualifications in India. The CFA program is regularly updated and revised every three years. The process of revision of CFA content is done on the basis on feedback from industry experts.

I had the opportunity to meet the academics head of CFA institute in 2017, and was glad to understand that CFA institute has a very scientific process of updating the syllabus. To be brief, this is how they actually design the curriculum;

• Meet industry experts (leaders) from various finance industry in equity research, credit, hedge funds, corporate finance.
• They evaluate what is the minimum level of knowledge required on a certain subject in the industry.
• Based on this global study, the curriculum gets revamped and updated.

Understanding Financial Modeling

Purpose

Financial modeling falls under the category of skills. Much like any other skills like negotiation or communication. In 2015 when I completed my CFA charter, I still had to learn financial modeling as a skill to even work in the equity research industry.

Key skills and techniques taught

The key skills and coverage of financial modeling skill are;

• Understanding and analysis financial reports
• Analysis of past market trends
• Creation and assumptions required for a business model
• Overall financial analysis.
• Excel and financial mathematics
• Discounted cash flow valuation
• Relative valuation
• Capital budgeting.

Career opportunities and benefits

So in the industry there are many jobs in equity research, investment banking, credit research or project finance which require financial modelling as the basic skill to even enter the industry. For example look at the job posting by HSBC For associate equity research. Now from a qualification perspective, they are ok with either CA OR CFA. However, they do required you know know financial modeling as a skill, which is mentioned as the first role and responsibility below.

To check what kind of questions get asked in a financial modelling based job, read my detailed article on Crisil interview questions.

Real-world applications of Financial Modeling skills

I could keep on writing about the real world applications, all day long and this list would never end. But I will try to list the real world applications that I used financial modeling for.

• Decision making for a equity investment
• Business decisions on starting a new business or start up idea.
• Creating trading strategies and testing them from financial risk perspective
• Calculating the debt level based on interest rate sensitivity.

Anywhere where there are numbers involved and an informed decision needs to be made, you need financial modeling

Comparative Analysis: CFA vs Financial Modeling

Now let me give you a comparative analysis between the CFA program and financial modelling skill.

Theoretical vs Practical Knowledge

So let me show you both the syllabus so it becomes even more clear, the difference between both.

Compare this to financial modeling syllabus which Il show you below;

When you closely look at both the syllabus and coverage, it should be clear that CFA is the theoretical base, while financial modeling is the application of CFA

Time and cost investment for each path

CFA program just like any other reputed qualification, takes time, dedication and investment. On an average

• CFA program requires on an average 3 years to complete along with full filling the charter requirements. Total Investment should be around INR 2.5 Lacs
• Whereas learning financial modeling takes hardly INR 30,000 to 40,000 and three months to complete.

Industry demand and job roles

CFA is considered an equivalent of a post graduate tier 1 degree in finance. Hence most of the niche level jobs in finance will accept CFA as the preferred qualification. However irrespective of the qualification financial modeling is a must.

Salary and career progression

At an entry level investment finance job, A CFA level 1 aspirant can earn between 4.5 to 6 LPA in India. Provided he has the financial modeling skill.

Benefits of Combining CFA and Financial Modeling

It’s absolutely necessary to add financial modeling in your bucket list, even if you were decided to pursue the CFA program. Let me clarify this for you.

Synergistic advantages in finance careers

So to answer this very briefly and to the point. You might be surprised to know that CFA itself has included financial modelling and python as the compulsory skills to be learnt by each student. Which means even if you pass the CFA exams at each level, it is compulsory for each candidate to get and pass the financial modeling certification.

Enhanced analytical and decision-making skills

I remember when I first started off in the investment industry right after completing my CFA level 2 exam. When I applied for a job interview in one of the reputed equity research firms in Pune. I was shocked and overwhelmed when the company expected me to make a financial model on Tata motors and present it to the research head the next day.

Apart from that experience, once I knew the skill today I can proudly say that I use these skills on every sphere of financial decision making. From purcchasing stocks to deciding the leverage on a real estate purchase.

Real-world case studies of successful professionals

Let me give you some live examples of our students at mentormecareers, who irrespective of being CFA level 1 and level 2 who learned the financial modeling skill and got placed in equity research.

Pranav Acharya,CFA level 1+ Financial Modeling

so Pranav was one of the students who did complete CFA level 1 but was unable to crack investment finance interviews. He learned financial modeling with mentormecareers and got placed in project finance.

Lavish Tuteja, CFA level 2+ Financial Modeling

Lavish a bright student but was facing rejection with equity research companies. Finally did financial modeling and got selected in visible alpha.

Varad Panure, CFA level 1+ Financial Modeing

Varad a student from pune wanted to desperately get into investment banking but was struggling with getting through the technical rounds.

Adesh Kadam, CFA level 2 Candidate + Financial Modeling

Even an interesting story is of Adesh kadam who comes from a non finance background but did his cfa level 1 and 2 and learned financial modeling to get placed in core finance.

Which is Better for You?

Now let me finally give you a simple guideline to check which one should be your priority. In case your answer is yes in any of the below cases then you should pursue CFA first.

Pursue CFA first, if you fall under the following category.

• Are you a graduate but dont intend to do MBA?
• Your MBA college is not among the top 10 in India
• You are from tier 1 Mba college but want to create depth in investments
• You are from non finance background but now want to shift to finance.

Pursue financial Modeling if you fall under the following category

• You already are a CA, CFA, Mba tier 1 or 2 but striking with placements
• You are a working professional in finance but want to get into core finance.
• You are pursuing your MBA but lack the skills

Conclusion

So let me summarise our key points

• Financial modeling is a compulsory skill to operate in any finance roles that involves decision making activities.
• The first round of any finance interview will directly or indirectly test your skills in financial modeling
• CFA is a qualification, financial modeling is a skill.

FAQs

• Can CFA be pursued before financial Modeling?

There is no such restriction but in my opinion learning financial modeling first, helps you in creating a base knowledge and also promotes interest.

• Does Financial Modeling help in CFA Exam success?

Yes and no. It can help you better relating with the content but you need to understand that CFA is an exam and exam needs specific preparation.

• Is it important to learn CFA and financial modeling?

Ofcourse, because with CFA you only have theory knowledge.

• How to become an investment banker?

Investment banker can mean a wide variety of roles but the essential requirements are top niche qualifciation, academic performance and skills like financial modeling.

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