During this time of heightened volatility, fear can dominate markets and obfuscate sound investment decision making. As the coronavirus crisis continues to place severe pressures on public health and the functioning of economies, the need for trust in the institutions and advisors that act on behalf of investors, as well as the financial system, is starkly apparent.
In late 2019, CFA Institute surveyed 3,525 retail and 921 institutional investors across 15 geographic markets for the fourth edition of our survey, “Earning Investors’ Trust: How the Desire for Information, Innovation and Influence is Shaping Client Relationships”.
Simply put, sound investment decision marking is predicated on trust – it is the bedrock on which financial relationships and transactions occur. Having a trusted firm or advisor can help investors navigate through the uncertainty of this crisis and weather the economic storm.
Global perspectives on trust
In the new study, we analyse trust at the financial system, industry and firm level. Trust is a multi-layered concept: it is dependent on information (the basis for decisions), innovation (ability to meet investors’ needs) and influence (the extent to which investors can exert control)
Half of retail investors and more than two-thirds of institutional investors surveyed believed their investment firms are well prepared or very well prepared to manage through a financial crisis. Investors with a trusted relationship with the firms and advisors that act on their behalf are much better equipped to navigate the market disruption.
At the financial system level, 65% of institutional investors and 46% of retail investors globally expressed a high or very high level of trust in the financial services industry – down slightly on 2018 levels.
However, there is a significant difference in trust levels among retail investors with an advisor (57%) and without an advisor (33%). Both retail and institutional investors cited trust as a crucial factor when hiring an advisor.
Trust levels in financial services also stand in contrast to the levels of trust among retail investors in the technology sector (60%) and in medicine (68%).
UK downbeat on pension prospects
Among defined benefit (DB) pension-plan sponsors and state or government pension sponsors, 47% thought it likely or very likely that their fund would need to adjust benefits downwards in the next 10 years (only 11% thought this was unlikely). In the UK, 60% expressed confidence that state-sponsored retirement benefits will pay out as promised, compared with 35% who did not have trust in state-sponsored retirement benefits.
The UK’s results compare slightly less favourably than global-level results. Overall, these findings suggest that, as pensions systems come under increased strain from market dislocations and lower-for-longer interest rates, the investment industry may be accruing a deferred trust deficit on its collective balance sheet. In time, the industry will have to adjust to manage a potential markdown in goodwill.
Q: How likely do you think it is that your fund will need to adjust benefits downward in the next 10 years (i.e. not pay 100% of benefits)?
Q: If you are eligible for a state-sponsored financial benefit in old age, do you trust it will pay out benefits as promised?
At the investment industry level, we found that innovation and technology can have a significant bearing on the level of trust among investors. About two-thirds of institutional investors and nearly half of retail investors with an adviser trust their investment firm more because of the increased use of technology.
However, more than three quarters of UK retail investors still trust advice from a person over advice from a machine; and having access to the latest investment technology is increasingly expected to matter to investors in the coming three years.
Q: In three years, which of the following do you think will be more important to you?
At the firm level, trust among investors is shaped by their desire for influence and control over investment strategies and products. Fees remain an important criterion in this regard, and 65% of institutional investors surveyed responded that they have renegotiated manager fees in the last year.
ESG investing’s positive impact
Demand for more customised investment solutions reflects the desire for greater influence and control, and ESG (Environmental, Social and Governance) products and strategies are growing. Institutional investors believe that ESG investing has increased trust in the industry.
Q: In your opinion, what impact has the growth of ESG investing had in terms of trust in the financial services industry?
Our survey also showed that 73% of institutional investors and 67% of retail investors (rising to 71% in the UK) would be willing to give up some return in exchange for meeting their values objective.
Q: Would you be willing to give up some return for an investment strategy that meets your values-based objectives?
Each of the dimensions of trust will be put under strain in the current market environment. To retain trust in this climate, investment firms and professionals should focus on the enduring elements of trust. These include maintaining credibility through building a track record, obtaining professional credentials and strengthening professionalism by continually improving knowledge, skills and abilities, combined with an ethical, client-centric orientation.
These elements together can create value for investors and engender stronger client relationships that will endure market cycles, including the unforeseen challenges created by the coronavirus pandemic.
Download the full Earning Investors’ Trust report here.
The factors that influence trust vary, and trust is not given uniformly across markets. Market snapshots highlight how trust is built in specific markets.
Markets included: Australia, Brazil, Canada, Mainland China, France, Germany, Hong Kong SAR, India, Japan, Mexico, Singapore, South Africa, United Arab Emirates, United Kingdom, and United States.