How to Build Investor Trust in 2014
In the 2013 Edelman Trust Barometer — a global survey that measure trust in institutions, industries, and leaders — people were asked to rank actions that contribute toward building trust. Fifty-nine percent of respondents indicated that placing customers ahead of profits was important. At the same time, only 23% of respondents thought that companies were performing well with regards to that measure. This 36% gap is quite large, and it suggests the potential for companies to gain trust by simply putting their clients’ interest first. This should not be a difficult thing to do, and as more firms realize this, we may see an increase in trust with a subsequent positive economic impact in the investment industry.
For asset managers there are many effective ways to raise the level of trust by increasing ethical behavior firm-wide. One way to accomplish this is proper, fair, and uniform presentation of investment performance. Adoption of the Global Investment Performance Standards (GIPS) is a powerful way to achieve this. These standards for investment performance presentation ensure fair representation and full disclosure of investment performance.
In the wake of many scandals in the news, asset owners have come to realize that, while very important, reported performance should not be the only factor in deciding whom to entrust the beneficiaries’ funds with. Following the tightening of regulations, and increasing supervision and inspections of investment management companies in the aftermath of various ethical lapses (e.g., the AIJ Investment Advisors case), market participants have come to understand that unless qualitative factors were considered when giving mandates to asset managers, it would be difficult to serve the long-term needs of plan beneficiaries.
Firms might also consider the adoption of the CFA Institute Asset Manager Code of Professional Conduct, which helps signal to stakeholders that firms are operating at high levels of ethical conduct. In a recent roundtable discussion, Michael Trotsky, CIO of MassPRIM, discussed how the issue comes into play for his beneficiaries. He noted that for a pension fund it is not only important that the asset managers with whom they entrust their funds perform well, it is equally important to bring this performance home for their beneficiaries. Recent scandals such as Madoff’s Ponzi scheme and the AIJ Investment Advisors fraud in Japan have demonstrated that things don’t always sync up in this manner. To create this synergy, one must shed light on the degree of ethical behavior that asset managers who manage these pension funds embody. Mr. Trotsky explained that his firm employs the Asset Manager Code of Professional Conduct as a template when conducting due diligence work before giving a mandate to an asset management firm.
The adherence of investment professionals to ethical practices benefits all market participants and increases investor confidence in global financial markets. Clients are reassured that the investment professionals they hire operate with the clients’ best interests in mind, and investment professionals benefit from the more efficient and transparent operation of the market that integrity promotes. Ethical practices instill public trust in markets and support the development of markets. Sound ethics are fundamental to sustainable capital markets and the enhancement of the investment profession in the eyes of investors.
Photo Credit: iStockphoto.com/stuartbur
2 thoughts on “How to Build Investor Trust in 2014”
I think one of the ways is to have more disclosure requirements ( like IFRS for accounting ) that requires the investment managers to justify their investment decisions and there should be Auditing standards for auditing Investment managers and their investment decisions for an Independent auditing firm or even a credit rating agency to reasonably conclude that Investment managers are doing their job well and are not materially deviating from what they are suppose to do. Relying on Audit reports of investment funds does not necessarily mean that the actions of the investment managers to earn those profits and losses are justified. I think CFA institute should take a lead in this area.
Thank you very much for your constructive comment. We will continue to contribute to the development of a market environment that is characterized by high levels of integrity and, as you pointed out, will continue to consider the merits of regulatory reform in the process.