Monday, March 2, 2015

The Value of Trust – Study of Investor Services

This 2013 joint study “should be of great concern” to members of the investment profession, since it signals several fundamental problems in the financial services industry according to investors, and is threatening the very integrity of investment management and capital markets, according to authors of the study CFA Institute and Edelman.

               Strong returns alone are not enough to earn trust on behalf of investors – and trusting an investment manager is the single most important factor in hiring that person, according to the findings. Also more important than performance alone is the investment manager’s behavior and an ability to demonstrate an aligned interest with his/her client.

Investors say the top attributes that build trust in their relationships with an investment manager relate to integrity – not performance. These attributes are transparency; taking responsibility for one’s actions and ethical business practices. And while investors (52%) believe that regulators have the greatest opportunity to affect change and enhance trust in the industry, it remains to be seen how effective these changes will be.

               In order to change the perception of their profession in the face of diminishing trust, the CFA Institute and Edelman advise investment professionals to be proactive and take it upon themselves to improve the likelihood of winning the trust of their clients. To do this, they advise acting transparently; demonstrating integrity and increasing frequent communication.

Some concrete ways to make a difference include providing clear insights into processes, risks, risk management and limitations; affirming the primacy of client interests and resolve or disclose conflicts of interest; aligning fee structures to reflect the client’s success in achieving risk and return objectives; and providing full disclosure of fees including calculations and the impact on the portfolio.

               In order to demonstrate integrity, they encourage compliance with a voluntary code of ethics and maintaining independence and objectivity; adhering to professional codes of conduct and standards; and disclosing regulatory infractions.

               Investment professionals could also adopt these practices in order to improve communication with clients:
·        take a client-centered approach to disclosure and reporting when possible
·        consider performance reporting not just on a time-weighted basis that reflects the
investment manager’s performance, but also on a dollar-weighted basis, as this will offer insight on the client’s actual performance given client-directed cash flows
·        provide a fair representation of the investments made, results achieved, expenses incurred, and risks taken

The results of the study, collected via online survey in the U.S., UK, Hong Kong, Canada and Australia show that the informed public is actually more trusting than the general public of the investment industry and that investors trust all other industries (technology, food and beverage, pharmaceuticals, consumer goods, automotive, telecommunications and even banks) more than the investment management sector. Investment management professionals would do well to take the results of this study into serious consideration and make changes accordingly, for the integrity of themselves, their clients and their industry.


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