Practical analysis for investment professionals
21 October 2014

How to Win Investors’ Trust

Have you ever wondered why a majority of individual investors ask their friends and family for investment advice, even though they may not have the requisite skills or experience to provide it?

The answer is quite simple. It is because they trust them and don’t believe that their friends’ or family’s advice is motivated by anything other than a desire to be helpful.

Concerned about potential ulterior motives, many investors do not implicitly trust the information they expect to receive from investment professionals.

Can You Blame Them?

With the combination of the financial crisis, events like the Libor scandal, and frequent news stories about financial organizations putting their interests above their clients, it is obvious why some investors may be concerned about the quality of advice and the motivations of their financial service providers. In fact, the 2014 Edelman Trust Barometer continues to show financial services to be the least trusted industry globally.

This lack of trust is an impediment to providing effective investor education. It also makes it hard to insulate investors from bad investment decision making.

The main focus of investor education is to change investment behavior by persuading investors to internalize the investment principles and best practices that can keep them out of the ditches. However, investors are unlikely to adopt new behaviors or regard them as important if they trust neither the substance nor the source of the information being provided to them.

Fostering Trust Requires Building Credibility and Demonstrating Integrity

Credibility is built through experience, education, accomplishments, professional designations, and past performance. Demonstrating integrity is all about behavior and performing in a way that clients value.

To determine the level of investor trust in the investment management industry and to gauge the behaviors that influence trust and which investor’s expect from their financial service providers, we developed the CFA Institute and Edelman Investor Trust Study. After questioning 2,100 investors globally, most survey respondents affirmed that financial service providers who are “trusted to act in my best interest” are more desirable than those with the “ability to achieve high returns.”

Investment managers who are best suited to build a trusting relationship with their clients are those who communicate often and are honest and transparent about all things, including fees and business practices. They also work under either voluntary or formal ethical codes or professional standards and are responsible and rational when addressing an issue or crisis. The study determined that “to restore trust, compliance with a voluntary code of ethics and maintaining independence and objectivity are the actions that matter most to investors.” In summary, investment managers demonstrate integrity by doing what is right and by ensuring that their clients’ needs take precedence over their own.

The Tools to Build Trust

The onus to foster trust by endorsing professional development, valued behaviors, ethical business practices, and a focus on solving client problems is not borne solely by the investment professional but is also shared by financial service organizations and the industry at large. A great number of CFA Institute products are designed to help one or more of these three stakeholders promote the foundations for trust.

The CFA Program Curriculum, a comprehensive body of investment knowledge, has been used as a model for professional development and certification, while the Code of Ethics and Standards of Professional Conduct provides a template for the design of ethical frameworks, for individuals and organizations globally. The Asset Manager Code of Professional Conduct, a global standard and best practice code of conduct for firms, was developed to aid ratifying financial organizations build more trusting relationships with clients by allowing them to demonstrate a formal commitment to ethics and professional conduct.

To help support the investment profession, CFA Institute has launched the Future of Finance initiative, “a long-term global effort to shape a trustworthy, forward-thinking financial industry that better serves society.” In addition to leveraging the perspectives of prominent global leaders and marshaling other industry resources to achieve its mission, the initiative creates tools that can improve the relationship between clients and financial service providers. The Future of Finance has already produced several products that aim to aide both parties in developing an honest and transparent dialogue about investment issues, among them performance reporting and fees.

One of the centerpieces of the initiative is the Statement of Investor Rights. Globally relevant and translated into 15 languages, the Statement of Investor Rights outlines the 10 rights that all investors should expect from their financial service providers. Investors are counseled to share the Statement of Investor Rights with any financial professional they do business with, whether one is working with an investment adviser, hiring a broker, or buying a home. The Statement of Investor Rights not only provides investors with a framework through which they can evaluate the ethical commitment of their advisers, it also offers professionals and their organizations an opportunity to endorse it and commit to upholding the basic rights necessary to ensure a more trustworthy relationship with their clients.

Each Stakeholder Has a Role to Play

Professionals working in the private sector and those that deal directly with investors have a unique opportunity to educate their clients and to change their investment behavior. Investors are most likely to consider new investment principles and ideas in making a financial or investment decision when the information is most needed and has the most value. Often this provides investment professionals with a captive audience that is open to new directions and behavioral change — as long as clients trust the substance or source of the information being given to them.

However, trust is not a panacea for providing investor education or changing investment behavior but should be regarded as a requisite element necessary to do both. A greater focus on business ethics and those elements that build credibility and demonstrate integrity should become a core competency for all stakeholders interested in creating a more trustworthy financial industry and elevating the reputation of investment organizations and the professionals that work for them.

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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credits: ©iStockphoto.com/ kmlmtz66

About the Author(s)
Robert Stammers, CFA

Robert Stammers, CFA, is director of Investor Education at CFA Institute, which includes management of the Inside Investing Blog. Previously, he was the principal for his founded company A2O Consulting where he consulted to aide real estate owners, lenders, and syndicators, develop and analyze structured real estate investments. There, Stammers developed strategy for obtaining debt and preferred equity capital as well as created finance-related marketing materials and research papers for various clients. He has written more than 100 articles on various financial and investment topics for several investment periodicals, such as Forbes and Investopedia. Stammers served as a senior equity analyst at Long Term Short Term, Inc, where he was responsible for the creation of new investment tools and instructional products to provide the revenues for two new investment education companies. As a senior executive for several institutional fund managers, he was the portfolio manager for a real estate fund, a private timber fund, and several pension fund separate accounts. Stammers holds a BA in economics from Connecticut College and an MBA from Emory University.

3 thoughts on “How to Win Investors’ Trust”

  1. Savio Cardozo says:

    Hello Robert
    I very much enjoyed your article as it is both prescriptive of actions required by investment professionals and it is reminiscent of one of the situations I am currently involved in.
    The latter relates to a friend, whose money is being managed by one of the most highly reputed investment organizations in the US.
    This friend relies on me to validate the information he receives from this organization because,as you put it so eloquently, I have no bias and nothing to gain.
    However, the main reason for my comment is that I have found it surprising that an organization of this size does not claim compliance with the GIPS standards for its reports to investors, and it is therefore quite unlikely that it claims compliance with any of the other standards of CFA Institute.
    As an ardent supporter of CFA Institute and its aims to help create a self regulatory framework for the investment profession, I always assumed that the largest organizations in the US claimed compliance with most of its standards.
    However, I recognize that the claim of compliance is quite specific and not all institutions can claim compliance for structural reasons or otherwise.
    Perhaps a listing of firms on the CFA Institute website that claim compliance with various standards would be helpful.
    Best wishes
    Savio

    1. Robert Stammers, CFA says:

      Thank you for your comment. CFA Institute does keep a listing a firms that claim compliance to certain to certain codes and professional standards. For example, on our website we provide users with a list of all the organizations that have claim compliance with the Asset Manager Code:
      http://www.cfainstitute.org/ethics/codes/assetmanager/Pages/firms_claiming_compliance.aspx

      As mentioned in my post, the AMC is a global standard and best practice code of conduct for firms, that was developed to aid ratifying financial organizations build more trusting relationships with clients by allowing them to demonstrate a formal commitment to ethics and professional conduct.

      As you mention, it is important for firm’s to acknowledge their commitment to ethics and to being transparent about all things including business practices, fees, and potential conflicts of interest. It is through the efforts of financial service firms and the professionals that work for them that the industry can be transformed into one that is trustworthy, forward-thinking, and that better serves society.

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