Investment Managers: Aligning with Investor Interests Repairs Fragile Trust
At the heart of investment transactions is trust: trust that counterparties will fulfill their obligations, trust that parties to the transaction are not acting at cross-purposes to investor interests, and trust that information about the transaction is not false or misleading.
The headlines in the aftermath of the global financial crisis underscore all the reasons why trust among investors might be frayed — from mortgage fraud that helped fuel the meltdown to LIBOR-rate rigging and banks’ self-dealing. Not surprisingly, investor trust in investment managers isn’t what it could be.
The newly released CFA Institute & Edelman Investor Trust Study — based on a survey of more than 2,000 retail and institutional investors from around the world — confirms underwhelming levels of trust, with just 53% of respondents trusting investment managers to do what is right. For context, consider that 67% of the same respondents expressed trust in the technology sector, and 60% said they trusted the pharmaceutical industry to do what is right. And consider as well that the survey respondents were investors with some degree of current engagement with the investment industry, with a ringside seat to observe the factors that build or destroy trust. Edelman — well known for the annual Edelman Trust Barometer to gauge public trust in government and business — applied its research techniques to the Investor Trust Study to build upon its analysis of the dismal level of trust in the banking and financial services industries generally.
However, trust in the investment industry hasn’t necessarily infected investor views of the capital markets. The study reports that 73% of respondents feel that they have fair opportunity for profit and loss in the capital markets, and while that represents a significant majority, it remains somewhat remarkable that fully a quarter of investors with active investment programs could not bring themselves to express faith in the integrity of markets.
Polls in the political arena often refer to “persuadables” as those without strong feelings one way or the other who can likely be moved to a more definitive position. The Investor Trust Study reports that the intensity of trust in investment management is low, with just 15% of respondents expressing a great deal of trust in the investment management industry. For the industry, these “persuadables” should suggest both risk and opportunity: trust can be further eroded with ill effects for both investors and the profession, or trust can be bolstered.
Trust Factors Heavily in Choice of Investment Manager
The investment management industry has long differentiated its products largely on the basis of performance and price, but the Investor Trust Study suggests that investors are giving significant weight to nonfinancial factors in their decisions of who to invest with. Investors cited “trusted to act in my best interests” as the most important factor in choosing an investment manager — far ahead of “ability to achieve high returns,” which was only cited half as often. And individual practitioners have a key role to play in establishing and maintaining trust: 55% of survey respondents indicated that the investment management professionals they had dealt with were effective in enhancing trust in capital markets, and these investment managers were cited as the second-most-important factor in enhancing trust going forward, just behind local financial regulators.
Clearly, investors are counting on regulators to get the reform agenda right to cure some of the ills laid bare by the financial crisis. But absent efforts by the profession to take action to address investor concerns about trust, there is a real risk of regulatory overreach that could be damaging to investors and the investment industry alike.
The study concludes that demonstrating aligned interests is the most important step investment management professionals can take to address the concerns of investors. Going beyond marketing patter to demonstrate tangible commitments to transparency, integrity, and clarity around the investment process are what investors are saying they need to feel more confident in the trustworthiness of the investment industry. While performance remains important, it may be the ability of investment managers to differentiate themselves with unambiguous commitments to aligned interests with investors that wins and keeps business.
Let us know what you think will repair trust in the investment industry!
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