Investment Professionals: Are You Earning Your Keep?
CFA Institute sees a long road ahead in terms of restoring investor confidence. Poll after poll reflects poorly on the financial industry. It is a function of not only the deep-cutting financial crisis still unfolding but a constant barrage of news about the latest fraud or Ponzi scheme. The phrase “Wall Street,” it seems, has become shorthand for an industry out for itself. So, as part of our “Challenging Industry Norms” series examining long-held notions about issues facing the investment industry, CFA Institute recently took on its most controversial topic yet — whether investment managers are delivering value for their clients (view the webcast).
That’s because the status quo will not likely move us towards rebuilding trust. Progress will require honest assessments of our industry and a more introspective approach. The discussion comes at a critical time, amid reports that the industry is underperforming and overpaid for the privilege.
In response, the “Challenging Industry Norms” discussion raised the following crucial questions:
- Are fee levels appropriate and aligned with client interests?
- Are these fees contributing to distrust and a growing restlessness with investment managers?
- What steps can CFA Institute take to improve investor trust?
Suzanne Duncan, global head of research for State Street’s Center for Applied Research, moderated the panel discussion, which featured Paul Haaga, board chairman of Capital Research and Management Company; former U.S. Securities and Exchange Commission (SEC) Chief Accountant Lynn Turner; Rosalind Tyson, regional director of the SEC; and Wall Street Journal columnist and author Jason Zweig.
Duncan kicked things off with a sobering statistic: While 85 percent of the equity managers studied underperformed the market in nearly all relevant time periods, the amount of fees extracted globally for this and other financial-intermediation services is in the range of $1.5 trillion annually.
The panelists weighed in on compensation in the investment management business, stressing the importance of defining and instituting more credible, long-term-focused compensation that rewards performance, not just asset accumulation by managers. Often investors pay management performance fees for short-term gains despite longer-term investment horizons. The notion of asset managers paying a negative performance fee for poor results also was raised during the panel discussion. Paying money back to clients from fees collected, when you as manager do not beat your benchmark, sent an air of unease across the audience of mainly investment professionals.
Other topics included how performance should be measured to determine whether value has been delivered to investors. One money manager noted that time-weighted returns reflected in Duncan’s statistics may not always reflect the true experience of a client who has been investing periodically, through market highs and lows over the long term. The panel discussed other aspects of the value proposition offered by the investment management industry, generally acknowledging that much needs to be done to educate and inform the average investor on products and services, as many are significantly unprepared for approaching retirement.
CFA Institute was complimented for taking an active role in both investigating industry challenges and setting examples for behavior and practice in an effort to restore trust and confidence. The panel encouraged our voice and message on ethical practice to remain loud and clear.
Where do you stand on this issue? Are investment professionals delivering value for their clients?