Paul Smith, CFA: Purpose, Professionalism, and the Rise of Trust

Taking the stage before an audience of investment professionals at the 71st CFA Institute Annual Conference at the Hong Kong Convention and Exhibition Centre, CFA Institute president and CEO Paul Smith, CFA, issued a rousing call for a more responsible and client-focused finance industry. He laid out the formidable challenges the industry faces, from diminished trust to business models far removed from end investor outcomes, and encouraged  those in attendance and watching around the world to take the initiative to confront and overcome them. “Let us seize this common sense of purpose,” he said. “Let us harness our energy, our ethical standards, and our goodwill in order to do great things and drive great change.”

Below is a lightly edited transcript of his remarks.

Good morning again everyone. Welcome and thank you all for joining us here today.

It is always a pleasure to meet with you at our annual conference. It is a particular pleasure for me to gather here in Hong Kong. This has been my home, my very happy home, for the last 21 years.

This is a time to reconnect with old friends and to make new ones. So if we have not met before, please — come up and say hello during the course of these three days.

I would again like to thank The Honorable Matthew Cheung for joining us this morning. It’s such an honor to have him here.

I also want to recognize Joseph Chan, Undersecretary of Financial Services and the Treasury Bureau. Joseph is not only a charterholder, he was the vice president of the Hong Kong Society of Financial Analysts before joining the government in 2017. Thank you for your service, Joseph, and for being with us.

Having such pre-eminent people in our midst demonstrates the strength of the CFA network and the capabilities of our charterholders.

This is the most important speech I give each year. It is my annual opportunity to inspire you and to seek to renew our sense of collective purpose.

You constitute the largest audience of our most influential members and supporters. Here we all have the chance to assess the current condition of our profession and of our institute. Here we set our goals for the year ahead.

This is also my chance to thank you for all your work to uphold our standards — and to advance the cause of our noble profession.

And it is a noble profession!

Why does that sound so odd to say?

Our profession creates real value for our clients, for the communities we serve, and for ourselves. We don’t say this nearly often enough. Nor do we explain our value clearly enough to regulators, to employers, and to the general public.

If we are to have a sustainable, rewarding future, we must do better. In a bold, loud voice we must proclaim our sense of purpose.

So what is that purpose?

Our industry’s future depends on proving two simple things to both institutional and private clients:

First, that their interests lie at the core of what we do.

Second, that we see a pivotal role for finance in helping communities attain their objectives. Not just financial objectives, but social goals as well. We must forge stronger links between what we do for a living — and a healthy society.

Surely, this is the very definition of professionalism.

Without a professionalized investment management industry, society struggles to move forward and will fail to resolve all the issues and challenges it faces.

But when we articulate a sense of purpose, we can achieve much.

We can achieve greater penetration of our potential client base — a client base that will be increasingly dominated by women and by members of the millennial generation. These clients typically expect more from their investments than just a simple financial return.

With purpose and professionalism, we can — over time — rebuild trust. And when we earn trust, we earn a sustainable future.

Last year in this speech, I sounded a series of alarms.

• I said our profession faced a trust crisis.
• I named existential threats, from automation to aging business models.
• I said it was up to us, CFA Institute, to frame an inspiring, positive answer to a basic question: What is finance for?
• And I said we must exercise leadership in redefining value and reclaiming trust.

A year later, the challenges remain. But we have made substantial progress along this road. Across our industry, I see several “green shoots” of recovery.

Trust in our industry is trending positive once more, according to our 2018 Global Trust Survey, called “The Next Generation of Investor Trust.” Please download it from our web site if you haven’t done so already.

Another green shoot: We see great improvement in the level of public discourse around the purpose of finance. At CFA Institute, our purpose is clear. It is in our mission statement: We work “for the ultimate benefit of society.”

Earlier this year, BlackRock CEO Larry Fink told the CEOs of companies in which BlackRock holds positions, and I quote: “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” End quote.

Another example: Anne Richards — CEO of M&G in the UK and a great friend to CFA Institute over many years — called recently in the Financial Times for investment management firms to adopt a much broader set of performance metrics.

We see these and more financial industry leaders echoing our call to work for the good of society.

They say that imitation is the sincerest form of flattery! And it’s about time!

This is real progress. As we continue to develop these themes, we build an industry that clients and regulators value in the broadest possible sense. One that is appreciated for its contribution to society and one that engenders trust. A virtuous cycle indeed.

In pursuit of these broader societal goals, we of course collaborate with many other leading bodies that share our agenda. You should be proud of our relationships with:

• The Systemic Risk Council
• The Aspen Institute
• the International Integrated Reporting Council
• Focusing Capital on the Long Term
• UN Principles for Responsible Investment
• And the Sustainability Accounting Standards Board, to name but a few.

Together our efforts are gaining momentum. But we must set our sights higher still.

CFA Institute is in a unique position to lead the way toward a more purposeful brand of capitalism.

If our industry rediscovers its sense of purpose, I believe we can better marshal the world’s financial resources against the globe’s most intractable problems.

And challenges we have aplenty.

• Underfunded retirement schemes.
• Poor or non-existent infrastructure.
• Climate change and environmental degradation.
• Financial inclusion.

The list goes on.

To advance the cause of capitalism with purpose, we have four key resources at hand. They are:

• Trust.
• The history of our profession.
• Lessons from emerging economies.
• And the skills and energies of you, our members.

First, trust.

We need to help clients understand whom they should trust and why. Trust is critical political capital. As an industry, we are amassing new equity in this space. We must invest it for greater returns.

As I said, new research shows trust on the rise around the globe. We are encouraged to see increased investor trust in financial services since our 2016 survey. Wounds inflicted by the financial crisis are finally healing.

In our new survey, three quarters of retail and institutional investors said it is important that the firm they work with employs investment professionals with credentials from respected industry organizations. Granted I am biased, but that’s where a CFA charterholder comes in.

For our profession, this data lights a path to greater influence. We need to help our clients identify the trustworthy: Professionals who have the charter, and institutions who adopt our codes and standards.

And let me be clear on one very important point: There is only one surefire way to build trust. And that is to put the client’s interests first. We stand for fiduciary duty. We improve outcomes for investors by acting in their interests. Full stop.

The second resource at our disposal is history.

Our profession has not always been seen as self-interested. Many of our forebears were even seen as . . . virtuous . . . or at the very least, useful!

At the dawn of the Industrial Age, they amassed capital to fund rapid economic expansion. In 19th century Europe and North America, the work of raising capital and rewarding investors was often seen as aligned with the broader public interest.

These were the emerging markets of their time. Expansion demanded enormous investment. The work of finance professionals helped build railroads, factories, buildings. Arguing the profession’s relevance in those days was not a problem.

And though financiers overstepped at times, society often did reap the benefits of their work. The results were visible in very tangible ways. People traveled on the trains and worked in the factories and buildings.

At its best, capitalism with purpose creates value that is broadly apparent and commonly appreciated. We need to press for more of that today.

Over the past 30 years or so, our profession has lost its way. Too much activity seems disconnected from client interests. Too much profit seems to accrue to intermediaries at the expense of the capital provider.

But we can change these dynamics.

We must drive focus on our ethical standards. We must harness technology to create better products, more consistently applied and sold at a fairer price.

We must champion more transparency [and] fees and business models more closely tied to investor outcomes.

Now to our third tool.

Emerging economies, which offer instructive case studies of capitalism with purpose. We can take lessons from new, robust finance frameworks, designed from the ground up for the 21st century and founded on modern technology.

I am privileged to experience much of this up close in my travels. What I see is a clear dichotomy — between the missions and motives of finance in the so-called developed world — and these vibrant emerging markets.

I am inspired by what I see, some of it in markets not far from where we sit today. I believe this region and others like it have much to teach the investment profession.

Let me give a few examples.

I have been so impressed by M-Pesa in Kenya and its impact on the people there. A mobile phone-based money transfer tool, it has given millions of people in Kenya their first access to the financial system. At one point, it was the world’s fastest-growing mobile financial tool.

Another: Alibaba’s money market fund — Yu’e Bao — has become, in just four years, the world’s largest. As 2018 began it had more than 370 million account holders and US$211 billion in assets. Its emergence from “leftover treasure,” as its Chinese name means, resulted from a sharp shift by Chinese consumers toward mobile payments.

Also in China: The government’s Belt and Road Initiative. They are not only innovative infrastructure projects, but their financing strategies lead the market. China is the world’s largest issuer of green bonds.

Finally, we see dramatic changes in India, where the Aadhar biometric identification system gives access to government benefits, bank accounts, and insurance for many people who previously lacked the most basic of financial products. It is the largest program of its kind anywhere. Aadhar represents financial inclusion at its best. It changes the way millions earn, save, spend, and plan for their futures.

These consumer finance innovations in emerging markets accommodate the small and often unpredictable cash flows of the poor. They enable even very small transactions to be handled cost effectively.

But on a higher, strategic level, these innovations help countries re-imagine and actualize their futures. They can change the course of history.

Our value is self-evident in the developing world. We see well-trained, ethical investment professionals helping to drive growth, create financial opportunity, and instill confidence in local financial systems.

This is vitally important work. But in the developed world it goes mostly undiscussed.

That should change. But how do we use our deep relevance in emerging markets to better explain our purpose in the first world?

To start with, we can help frame these opportunities better for first-world investors.

The developing world requires an estimated $3 trillion US dollars in new infrastructure investment — each year. Which sounds like a lot, but the world generates through new savings balances about $6 trillion in fresh capital each year.

No shortage of money then. But can we do a better job as an industry of connecting investors with opportunities?

In fact, we can think more deeply about the role traditional capital markets play in the modern world.

Today in the United States and across Europe, the big game-changing ideas are often funded privately. Many new ventures aspire to an IPO not as a start, but as the end point of their fortunes. Non-public market funding of new businesses can exclude retail investors from participating in early stage growth.

When so much growth occurs in a pre-IPO phase, it changes the very nature of the returns that can be expected from public markets. But those markets are the sole recourse for many retail investors.

How can we do better for them?

Surely our purpose is not merely to beat an index, but to help our clients achieve financial outcomes and long-term security. Yet many orthodox, everyday investment channels may leave people with too little, even when they think they are doing everything right.

Acclimating them and regulators to worthwhile risk — and influencing market frameworks to support more rewarding options — should be part of our purpose. Building bridges between retail investors, under-served in today’s environment, and opportunities in emerging economies might prove rewarding for all concerned.

That brings me to the fourth and, in many ways, the most important resource at our disposal: You!

You have unique power to shape the future — by leveraging your local relationships and expertise to positively impact the investment industry in your community. You are our best and most credible ambassadors — and through your efforts we will raise the standards of professionalism in our industry globally.

For us to be impactful in the 165 diverse countries with CFA Institute members, we must shape our local profile and define our relevance 165 different ways. This is no small task. Your energy, enthusiasm, local knowledge, and most importantly, your professionalism, will make all the difference.

The more you succeed locally in connecting our industry with its purpose, the better your client outcomes will be. Our industry will gain strength and your own career will be more sustainable and rewarding. So speak up loudly and clearly — in support of an industry that strives to put client interests first and works to see that our efforts enrich our communities.

I can promise you this — your Institute will support you through your local society, and provide resources for you, to help you execute on this mission. There is nothing more important on my agenda than working to empower strong local societies in which our members can deploy their talents for “the ultimate benefit of society.”

I asked this question last year. I asked it when I began these remarks, and I will close by asking it again:

What is finance for?

As I said earlier, the answer in the markets of the 18th and 19th centuries was that finance created more economic advantage. It multiplied opportunity across the spectrum. It narrowed the gap between haves and have-nots. It was a mechanism to see that everyone, whatever their original circumstance, got a chance. It did not guarantee outcomes, but it did provide openings.

That sounds deeply relevant again today.

Traveling the world for CFA Institute, I have learned this one true thing: In our ranks there is much to admire. We are women and men of honor and ability trying to do the right things.

Let us seize this common sense of purpose. Let us harness our energy, our ethical standards, and our goodwill in order to do great things and drive great change.

With trust and a sense of history, with respect for new ideas from new places — and, above all else, with YOU — everything is possible: for our profession, and for society itself.

I have great faith in our future because I place my faith in you.

Thank you.

This article originally appeared on the 71st CFA Institute Annual Conference blog. Experience the conference online through Conference Live. It’s an insider’s perspective with live broadcasts and recorded video archives of select sessions, exclusive speaker interviews, discussions of current topics, and updates on CFA Institute initiatives.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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