From Bust to Trust

Paul Smith CFA Institute

In The Big Short, Steve Carell plays Mike Baum — the fictionalized version of Steve Eisman of FrontPoint Partners — and emphatically voices the fiduciary responsibilities of many professionals in the lead-up to the US housing market collapse in 2007–2008. His earnestness, his frustration, and his rage about the breadth of deception suck you in to a movie that is riveting. The depth of his intensity is palpable, and what he stumbles upon has global ramifications; we all remember where we were when Bear Stearns collapsed eight years ago.

Finance professionals are still pounding the pavement to regain trust — on behalf of our industry, on behalf of our firms, and as a reflection of our personal integrity and business ethics. And it looks like we have turned the corner. During our latest investor survey, From Trust to Loyalty: A Global Survey of What Investors Want, CFA Institute partnered with Edelman Berland and interviewed more than 3,300 retail and 500 institutional investors; what they told us is worth repeating here and exploring a bit further.

  • As an investment manager running a pension fund, endowment, foundation, or family office, are you a partner for your client? Do you know your client’s business priorities? The complexities of internal politics? – Investors tell us they want their investment managers to go beyond the mandate.
  • Have you re-evaluated your client communications lately? The frequency? What’s disclosed? Do you go beyond what’s required? Have you asked what you can do to improve your communications? – Investors want transparency — clear, forthright, regular communications.
  • Did you know that retail and institutional investors similarly prioritize the reasons they would leave an investment firm? – Survey results indicate the following reasons for leaving an investment firm (listed in order of importance): underperformance, increases in fees, data/confidentiality breach, lack of communications/responsiveness, and regulatory sanctions.

The survey also raised another issue we’re all familiar with: the importance of “the human touch” and the tradeoffs involved in choosing between humans and machines.

With the exception of those in China and India, retail investors strongly prefer (by a two-to-one margin) people they can count to a brand they can trust. This indicates that an investment firm’s brand is only as good as its people. That said, we all know things are changing. Take a look at China, India, and (to a lesser extent) Singapore, where 50% or more of retail investors say that having access to the latest technology and tools is preferred when executing an investment strategy. Does this mean that financial advisory services are ripe for disintermediation?

Modular Financial Services: The New Shape of the Industry, the latest annual report on the financial services industry by Oliver Wyman (a Marsh & McLennan Company), uncovers trends in customer behavior that match the trends our survey found in China and India. The Wyman report reveals four “shocks” that have occurred, are happening now, or will happen in the future: (1) changing customer expectations, (2) new technology, (3) tighter regulation, and (4) new competition. These are familiar themes to all of us. Deeper in the report are two takeaways that struck a chord with me: first, is that successful firms of the future will understand their customer problems, and second, that firms need to identify their strengths.

For those who know CFA Institute and are or aspire to be CFA charterholders, these themes are familiar and tie right back to both our 2016 Trust to Loyalty survey and The Big Short. During a time of crisis, the survey identified the top expectations investors have for their investment firms: action and communication. Specifically, investment firms should take decisive action to protect their customers’ portfolios, provide market updates in the context of portfolio construction, and communicate regularly. The top three strengths institutional investors look for in investment managers is acting ethically, fully disclosing fees, and having reliable data protection security measures. I know these themes will resonate with you; we should all be doing our part to both ensure and promote such behavior.

As for the two Florida mortgage brokers shamelessly selling NINJA subprime mortgages? Well, we know what happened to them. And no character could be further from what we all hold true: our fiduciary responsibilities.

This post was originally published on LinkedIn.