The Credibility Gap: The Systemic Implications of Trust (Video)

At the recent Global Investment Risk Symposium, John Taft, head of RBC Wealth Management in the United States and author of Stewardship: Lessons Learned from the Lost Culture of Wall Street, spoke about the implications of the widespread loss of trust in financial institutions following the financial crisis, noting that his work to restore trust and confidence in the financial markets and the financial system dovetailed with similar efforts by CFA Institute.

Last year, John Rogers, president and CEO of CFA Institute, issued a call for action to restore trust in the financial services industry, asking CFA charterholders to be a bolder voice for ethics, focus on financial activities that enable economic progress, and share their knowledge and skills with others in the field of finance.

Taft said that today, investing is “an act of faith.”

“For individuals to put their savings into stocks, or into bonds, or into mutual funds, or into any one of the thousands of investment vehicles available globally, they need to believe at some fundamental level that the future will be better than today,” he said. “And that faith in a better future fundamentally was what was disrupted, broken, crippled — use whatever word you want to use — by the financial crisis. And it has yet to be restored.”

Taft said society has certain expectations for what role businesses and industries should play. And in return for businesses and industries respecting that contract, society grants the business or industry a franchise to conduct their business. “Think about the franchise that society grants to the financial services industry, and think about whether we lived up to our end of the contract,” he said. “That is the source of the lack of trust and confidence we are dealing with today . . . you can’t have an economic or financial system without trust.”

What can we do?

• Be thought leaders (for example, see the CFA Institute Integrity List: 50 Ways to Restore Trust in the Investment Industry)
• Encourage leadership to use different vocabulary and demand better behavior
• Embrace regulatory reform and do what we can to get it right
• Consider environmental, social, and governance (ESG) investing

Some of the other themes covered in the presentation and Q&A above:

• “Stewardship ought to be the principle that undergirds the financial services industry.”
• “Like the issue of bullying in schools, it’s not enough to be a bystander. If you see untoward behavior, you actually need to identify it and name it and shame the perpetrator. That doesn’t go on enough in our industry.”
• “A fiduciary is not obligated to have a conflict-free relationship with their client. . . . The obligation of a fiduciary is to disclose any conflicts . . . transparently and explicitly, and to not act in a conflicted way unless and until the client accepts the conflict.”
• “People are embarrassed to tell their families they work in the financial services industry today. . . . That shows that we have lost touch with what our purpose, mission, and role should be in society. And until we find our way back there, we won’t solve the systemic issues we are having with lack of trust.”
• “Having a fiduciary standard is a step towards the kind of regulatory improvement that will help promote trust and confidence. I would like to be able to say ‘every one of our advisers is a fiduciary.’ I would love to be able to make that statement to my clients and shut off the narrative that we are merely between 9:15 am and 9:25 am conflicted merchandisers of unsuitable product, but then we put on our advisory hat.”
• “The fiduciary standard would be huge step towards restoring credibility in our industry.”

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