Financial Reform: Investment Managers Need a Seat at the Table
The following is an edited version of a speech delivered by Robert Jenkins, adjunct professor at the London School of Business, at the CFA Institute Society Leadership Conference, held in Washington, DC, on 19–21 September 2013. Jenkins, a former policy maker at the Bank of England and a newly appointed member of the Board of Governors of CFA Institute, bemoans the banking industry’s influence on financial reform and challenges the investment management industry to step forward and help shape the debate through initiatives such as the Future of Finance, a long-term global effort launched by CFA Institute to shape a trustworthy, forward-thinking financial industry that better serves society.
Like many in the audience I have worked both the “sell side” and the “buy side.” Personally, I much prefer the buy side. In the long run it is better to be with the people who have the money than consort with those who need it.
Globally, there are some $70 trillion of professionally managed assets. That’s a lot of dough. And although it’s not “ours” per se, it is ours to advise, direct, maintain, and grow. As a profession and as an industry we are vital to the system. We offer clients the opportunity to diversify their investments and access markets to an extent and at a price they would be unable to achieve on their own. And in the process, we bundle streamlets of savings into rivers of capital that fuel economic growth. Needless to say, we are far from perfect. But we are pivotal to the financial system to which we contribute, in which we operate, and from which we draw our livelihood. The sell side knows this. With our fingers on the flows, they court us daily. Regrettably, the body politic does not. When it comes to making the rules that shape the flows, it is often the sell side that shapes the policies. Distinctions between investment banking and investment management are lost on the layman. And the layman’s elected representatives too often look to global investment bankers as spokesmen for the whole of the financial sector.
What is the source of the banking industry’s influence? Why is the weight of our industry not nearly as great? Why are bankers so much more likely to stand up and speak out? There are many reasons. The banking industry — particularly the investment banking industry is highly concentrated; asset management is fragmented. Their industry is subsidized by the taxpayer; our’s is not. They can and do concentrate a lot of firepower to protect their interests. We, by definition, are less able to coordinate our message and historically less willing to spend shareholders’ money to get that message across. Finally, there is something about the personalities within the business. Call it the nature of the beast. Many of us tend to the thoughtful and analytical. We often prefer a quiet room to a public podium. The sell side is generally better at selling — however inflated and flawed their pitch may be.
Now this is a pity. Worse, it is dangerous. First, there is the galling issue of mistaken identity. Though we are not paid at the same rate we are tarred with the same brush. In Europe for example, the first reaction of Brussels to a banking crisis was to pass legislation aimed at the hedge fund and private equity sectors. More recently, pay restrictions on banking have been proposed for investment management. And on both sides of the Atlantic, the damage to trust in the financial sector continues and continues to affect us all. In the eyes of the public and many politicians, we are all investment bankers now.
Second, and more importantly, the authorities are currently rewriting the rule book for the global financial system. Though often labeled banking reform, the debate features problems and proposals whose objective is the restoration and preservation of global financial stability. And no other sector of finance has a greater stake in stability than the investment management profession. It is in our interest that these reforms succeed. Our clients and colleagues will suffer yet again if they fail.
Yet, to date, this titanic tussle has been left largely to the formidably funded banking lobby in one corner and the authorities in the other. Academics have weighed in with truth and light — but although their intellectual capital is great, their political influence is not. So we are the missing piece. What stakeholder group other than the investment management profession has the combination of financial expertise, credibility, and clout sufficient to counterbalance the banks and so better shape the outcome of the debate? As a former regulator I can assure you that our views would be welcomed and valued. But we must be willing to voice them. We need to stand up and we need to speak out.
I therefore welcome the CFA Institute’s greater willingness to engage. The Future of Finance initiative can have an impact. At the very least, it will give us a voice in the room and a seat at the table.
Ladies and gentlemen, the future is not what it used to be. Whether it will be what it can and should be remains to be seen. But we have an important part to play and we owe it to our clients and colleagues to play that part.
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