Future of Finance: How Do You Rebuild Broken Investor Trust?
CFA Institute recently partnered with Columbia University to hold a Future of Finance Colloquium on the state of trust in the financial industry, the future of the financial services industry, and the future of financial industry supervision.
The keynote address by Richard Edelman, president and CEO of Edelman, included sobering statistics pointing to the current lack of trust in financial services. These indicators should come as no surprise to those familiar with the 2013 CFA Institute and Edelman Investor Trust Survey. He noted that trust tends to be event-based, emphasizing that trust in financial services has rebounded from its lows at the height of the financial crisis, but that the industry still rates among the lowest in the annual Edelman Trust Barometer.
Richard Edelman noted that leaders today have lost the ability to influence trust as directly as in the past because people today get their news and information from a number of sources, and typically have to hear something from a number of trusted sources before they believe something to be true. As far as which organizations people trust, non-governmental organizations (NGOs) come out on top, followed by business, the media, and government in last place. Although government ranks low on the Trust Barometer, people generally say they want more regulation of financial services due to their lack of trust in the business.
The first panel of the day looked at a financial industry under siege. On the bright side, a recent survey from the Center for Audit Quality noted that 79% of the public has confidence investing in US companies in the capital markets. On the not-so-bright side, the survey found that corporate boards (with a 49% confidence rate) are the least trusted of entities to look out for investors. In addition to efforts to build trust on the part of financial services providers, the panel cited the need for more efficient regulations and better enforcement, as well as better incentive structures in financial industry to help build public trust.
The second panel of the day focused on what the financial industry of the future may look like. The panel agreed that better — not necessarily just more — transparency is part of what’s needed in the future to help build trust. The conversation emphasized a possible future where the financial products offered to the masses and high-net-worth individuals may diverge, for very logical reasons. The past few decades have slowly educated most of the mass market of investors that passive investing may be their best bet for reaching their investment goals. Investors realize now, more than ever, that they are often best served by low-fee, low-turnover indexed products to attain their goals, such as home ownership, retirement, children’s education, and others. On the other hand, high-net-worth individuals will continue to demand more alternative and specialized products to cater to their needs.
The final panel of the day focused on the future of financial regulation. The panelists agreed that the pendulum has swung far away from the light-touch financial services regulation endorsed by some before the financial crisis. Like the earlier panel, the participants emphasized the need for enforcement with teeth so that market participants could see justice served in the cases where regulations are broken.
They voiced concerns that the needs of investors and the public currently seem to be low on the list of regulatory priorities, especially when regulators look to address risk. An example: “too big to fail” financial institutions in the US, where regulators still haven’t adequately addressed the issue, leaving investors and taxpayers holding the bag should a large financial institution fail.
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