In the following article, I’m going to dig into data available on Payscale.com to analyze the effect a CFA has on the median analyst’s salary. While I don’t use any data based on fewer than 100 respondents, a limited sample size in some instances may be significantly affecting the figures shown. Furthermore, it is not possible to separate out salaries for those without CFAs so all comparisons are those with CFAs vs. the overall median for that category. Another shortcoming is that this post focuses purely on salary compensation of employees, excluding other forms of compensation including commission, bonus, and perks. Salary compensation alone may not always show the full picture, but on average – I would expect the CFA-related compensation increases in these areas to fall in line with increases in salary. Finally, the data in the article is based only on salaries in the United States as this provided an ample and accessible set of data. This isn’t a scientific study, but merely an attempt to find some interesting stories within the data. Without further delay, let’s get to it.
Salaries by Job Type
The average CFA in this chart and all charts to follow is based on the weighted average (weighted by a number of CFA salaries in each category) of all other categories in the chart. In general, the CFA designation increases salaries by around 15-20%. It appears that the CFA designation generates a larger salary bump in more senior roles than it does with more entry level positions. The exception here is obviously the senior financial analyst, showing the smallest salary bump among all top job types. I would guess that this is not actually due to the CFA designation being less valuable to the financial analysts with “senior” in front of their title, but instead that there is a very gray area between a financial analyst and senior financial analyst, which is causing some inconsistencies in the data.
In looking at the data again, it was surprising to see the significant difference between the median salaries for financial analysts and senior financial analysts. I was also surprised by the small gap between the investment analysts and financial analysts. I think most of this boils down to the imprecision of the most common titles handed out in the finance industry. A title might mean one thing working for an investment consulting firm, but mean something completely else working for an investment bank. With all that said, perhaps the most surprising figure was the median salary for a portfolio manager sitting around $83k – this seems a bit low for a position that tends to be at the top of the pay scale at many financial firms. First of all, this is a position that receives a significant amount of compensation in bonuses. Secondly, the median portfolio manager salary includes not only the salaries of large fund managers but also bank employees managing loan portfolios and other less lucrative positions. It could go without saying, but the one clear story here is that getting your CFA certainly doesn’t hurt your career prospects. Who knew?!
Salary by Industry
It’s difficult to tell if there’s much you can learn from the chart above. Ultimately most of the common CFA-related industries pay somewhat close to the average CFA salary of about $86k. I did not expect to see banking and insurance at the top of this list, but this could potentially be due to the chartered analysts in these industries having more experience than the chartered analysts in, say, asset management. If we look at the broader salary medians (not limited to CFAs), we see that the average employee in both banking and insurance is paid less than every other industry shown above except wealth management. This may reflect the greater number of entry-level/administrative employees within these industries relative to other industries in the list. The median salary for wealth management and investment services employees falls significantly below the median salaries in financial services and asset management. This difference remains roughly the same when including only employees with a CFA.
A different perspective on industry salaries may help to shine a new light on the Payscale data.
Take a moment to look through the chart above as it tells an interesting tale. The two fatter lines reflect the salaries of CFAs and finance MBAs through each stage of their career. Now, keep in mind, this isn’t a perfect comparison. The CFA Average includes those that also have a finance MBA and the Finance MBA category includes those with a CFA. That said, on average, an employee with a CFA tends to be paid more than an employee with a finance MBA. What’s particularly intriguing about the graphic above is that employees with a CFA/finance MBA or working in the asset management Industry are all paid a relatively similar amount, on average, in the earlier stages of their careers. However, CFAs tend to make significantly more as they gain experience.
Let’s look at this in a slightly different way.
The transition into what’s considered the mid-career in the chart (5-10 years’ experience) tends to reward employees of all financial industries similarly (at least as a % of prior salary). Of course, as a requirement, all CFAs still technically considered entry level are already on the brink of transitioning into the mid-career stage. As employees move into the experienced stage of their careers (10-20 year experience), that’s when a CFA designation really pays dividends. Even as employees move into their late careers, the CFA continues to pay off. While the average finance MBA generates a respectable salary increase in these later stages, it fails to keep up with the value of the CFA. Finance MBAs from only top schools, however, likely outperform CFAs alone.
Salaries by State
Now we’ll take a look at the salaries split up by US state. Since all other states lacked a sufficient amount of respondents, we will look at just six states in this comparison: New York, Pennsylvania, Texas, Illinois, California, and Massachusetts.
Similar to the % raise figures shown in the very first chart, the salary multiple simply takes the median salary earned by a charter holder in each state and divides it by the median salary earned by all employees in that state. In this regard, the CFA edge tends to be fairly similar among the US states shown above with the exception of California and Massachusetts, which lag slightly behind.
When we take a look at the total salaries of charter holders in these states, nothing necessarily catches the eye. The CFA Salaries by state tend to stay in line with the national CFA median salary of approximately $86k, fluctuating slightly in relation to the cost of living in each state.
Now that we’ve brought up cost of living, let’s dive a bit deeper into this topic.
The cost of living adjustments here have been based on the most CFA-populated city within each state. This is a strange approach, but one that hopefully doesn’t skew the data too much because, for each state, the selected city accounts for over half of the state’s CFA residents. Cities used in the adjustments include New York City, Philadelphia, Dallas, Chicago, San Francisco, and Boston.
Taking a look at the numbers, one thing is clear – New York is expensive. So expensive that it appears difficult for financial firms in New York to possibly compete with financial firms anywhere else in America. Of course, the chart fails to tell the whole story. First of all, I dislike salary adjustments like the one above, because it makes the assumption that every dollar earned is also spent. If you manage to save a bit of money working a finance job in New York City but intend to move to Detroit after a few years – the money you saved isn’t less valuable simply because you saved it in a more expensive city. Also, I don’t know many people who would give up a job paying $175k in New York City for a job paying $100k in Dallas simply because it makes sense on a cost-of-living-adjusted basis.
Taking these imperfections into account, I think there is still a somewhat valuable lesson to be learned from these rough calculations, and it really applies to those that have no intention of becoming charter holders as well. Simply put, jobs in more affordable regions like Dallas, Philadelphia, or Chicago may be worth another look if you’re currently comparing them to a position in a pricier area like San Francisco or New York City. However, if you do take a second glance, you’ll probably want to get more in-depth than a basic salary adjustment. Instead, I would recommend trying to get an idea of the net income you could expect to make in each position/area.
Another interesting way to explore the CFA edge is through comparing the salary bumps based on the employee’s skill set. It’s worth noting here that respondents only provide what they consider to be their top 3 skills. When we break down the CFA salaries by skill set, the average salary increase amounts to nearly 20%. Similar to previous charts, I’m a bit hesitant to point out any trends in the data as it is unclear what’s ultimately causing the trends. The large salary bumps from those skilled with Microsoft Excel may simply be due to the fact that the employees listing Excel as a top 3 skill have a significantly lower starting salary (pre-CFA) than any other of the most common finance-related skills. The big bump in research analysis salaries could be mostly caused by the relevance of the skill in other, lower-paying industries. I don’t want to speculate on the underperformance of skills like financial modeling and forecasting here, but I will say that you shouldn’t be too discouraged if you consider these skills to be among your most valuable traits.
Before moving on, let’s take a look at how the skills stack up after the CFA raises are taken into account.
Unsurprisingly, the more advanced skill sets (correlated with more years of experience) like risk management, portfolio management, and investment management tend to pay off for charter holders while CFAs with more entry level skills in financial reporting, data analysis, and Microsoft Excel (hey that’s what I’m good at!) tend to get paid quite a bit less.
Salaries by Degree
For this breakdown, I had to take a slightly different approach because the median salaries for those with a CFA are not provided by degree on Payscale. Instead, only the range from the lowest 10% of earners to the highest 10% of earners is provided. So the graph above is comparing these ranges for CFAs against all graduates with the same degree. In this case, the salaries for those with a Bachelor’s degree does not include those that went on to receive a higher degree.
Across the board, charter holders tend to be making significantly more than their average class peers. However, as with our other “raise” calculations, we’re not comparing apples to apples because the CFAs have a minimum of four years’ experience and are also being compared to graduates going into lower-paying industries. Despite the imprecision here, it’s apparent that a CFA pays off in spades regardless of the degree held. The payoff is most significant for Bachelors of Arts graduates, somewhat unsurprising given the relatively low starting point. However, the CFAs with a BA are paid slightly more than CFAs with a BS or BBA in the bottom and top deciles. Finance MBAs received the least % benefit from their CFA, but nevertheless, earn quite a bit more than charter holders that did not receive a graduate degree.
CFA Rate of Return
What may be more telling and what I personally have pondered is if the CFA designation is really worth all the time and effort when properly accounting for not only the expenses but also the opportunity costs.
When I first attempted to calculate the expected return for a prospective CFA candidate, I got a 37% internal rate of return across a 30-year time horizon. This original calculation assumed the candidate made it through each exam in one try, which is pretty unlikely (on average). The comparative salary without a CFA was based on the industry salaries over time, weighted by the number of CFAs within that industry. I thought these assumptions were pretty optimistic so I attempted to make the CFA look bad – or, at least, not as good.
The new CFA salary model assumes that the candidate has to take each exam three times before passing. Furthermore, the salary without a CFA is the average of the non-CFA salary and the CFA salary used in the previous model – effectively cutting the initial salary difference in half. I think this adjustment makes sense to some extent because the base non-CFA salary average is probably being pulled down by lower paid positions unlikely to be held by prospective CFA candidates. A number of assumptions had to be made for the number of years spent in each career stage, the rate of salary increase during each stage, and the salary increase after reaching the late career stage (2% for CFA salaries and 1% for non-CFA salaries).
To account for the opportunity cost, I took the non-CFA salary for each year and divided it by 2,080 to get a hypothetical hourly rate and then multiplied that by the average hours studied for each exam. The average study time amounts were taken from the June 2016 CFA Candidate Survey conducted by the CFA Institute, which reported that Level I candidates spent an average of 304 hours studying, Level II candidates spent an average of 329 hours, and Level III candidates spent an average of 334 hours.
By changing the assumptions, the 30-year internal rate of return drops from 37% to 12.9% and the 20-year return (up through 2036) drops to a modest 8.4%. Nevertheless, these are still strong returns given that the average charter holder didn’t have to register and study for nine exams. Additionally, if a candidate fails an exam, it’s likely they won’t have to put quite as much time into the same exam next time around. Also, the opportunity cost used is probably on the high end because the average full-time finance professional works more than 40-hour weeks (so the 2,080-hour divisor is a bit low) and because it is rarely possible in reality to exchange your free time for cash at the same compensation rate as your primary job. Lastly, many employers in the CFA-relevant fields cover some or all of the enrollment, registration, and renewal fees for their employees and may even offer a bonus upon passing.
Here’s how the rate of return changes over time with those same pessimistic assumptions:
So the numbers are telling us that CFA candidates earn a solid return on their investment on average if they can stick with finance long enough, but life tends to be a bit less clear-cut than a simple spreadsheet. In real life, it wouldn’t be easy to sign up a third time for each successive exam. The data on CFA salaries has an inherent survivorship bias in that it fails to take into account all the candidates that gave up at some point along their journey to become a charter holder. It takes quite a bit of mental resolve to even give an exam a second try fearing that you might come up short again or that you might be better off taking your career in a different direction. Some people may be below average test takers regardless of how well they understand the test material and thus have the odds stacked against them.
Beyond the personal struggles, another issue is that we’re taking incomplete data and rough guestimates to project what might happen in 20 or 30 years – an approach that usually doesn’t tend to work out too well in finance, or in many other fields for that matter. A CFA pays off well in 2017, but will that continue to be the case in 2047? With more and more analysts taking the CFA exams, does the charter’s value decrease over time? Does a CFA become less of an advantage and more of a pre-requisite in certain fields? How relevant will the current CFA curriculum be in 10 or 20 years as technology continues to transform the finance industry? These are all questions that are difficult to answer no matter how much data you collect.
So after spending so much time doubting the relevance and integrity of the data, what are the real takeaways from this post?
Well, it’s fairly clear from the job type and industry experience breakdowns that the CFA continues to pay off as chartered members progress later into their careers. In fact, a CFA tends to be most valuable with more years of experience. On average, a CFA earns more than an employee with a finance MBA. In the analysis by state, we see that financial firms in California (mainly San Francisco) and New York (mainly New York City) fail to entirely compensate their employees for the relatively higher cost of living. However, this is likely due to the fact that employees in those states are fine with pocketing less income net of expenses to live and work in a more ideal location. Finally, the benefit from a CFA held up regardless of the top skills analysts possessed or what degree they held.
Comparing the prospects of a hypothetical career with and without a CFA, it’s clear that the average CFA candidate in 2017 will likely be well-compensated for their cash and time investment in the future. That is, if they plan on staying in a relevant field for a decade or so after receiving their charter – even if they had to attempt each exam three times. Of course, it should come as no surprise that we’re bullish on the benefits of a CFA. After all, most CFA candidates don’t want to hear that all their efforts have been futile.
All in all, if there’s one takeaway from this article for the CFA candidates out there, it’s this: keep studying (or start studying) because it’s worth it (probably)!