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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