Wednesday 20 September 2017 3:33 pm CFA Institute Talk

How to foster trust and create value in the investment industry

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  The “Future State of the Investment Profession” study by CFA Institute explores evolving states of trust and their interdependence with demonstrating and creating value.

To get a better understanding of what it means for investment professionals to provide value and how that relates to building trust and improving investor outcomes, we discussed these topics with Anne Cabot-Alletzhauser. We focused the interview on the interdependencies and what investment professionals need to concentrate on in the next five to 10 years to foster trust and create value.

Cabot-Alletzhauser is head of the Alexander Forbes Research Institute, an initiative that studies savings and investment issues for South Africa and Africa in general. Her industry research and more than 30 years as a pension fund manager give her a distinctive view on professionalism in the investment industry and its role in building trust with clients.

Cabot-Alletzhauser is a member of the Future of Finance Content Council, a former pension fund CIO, and asset manager for pension fund assets in North America, Japan, the United Kingdom, Europe, and South Africa. She also pioneered the development of the multi-manager management approach to pension fund management that is the hallmark of the industry today.

CFA Institute: There was a time that producing an adequate return on capital was all that investment professionals needed to be concerned with in producing “value.” Since the perception of value evolves over time, how has it changed and what will investment professionals need to do to demonstrate value in the next five to 10 years?

Anne Cabot-Alletzhauser: Perhaps the best value we need to start providing clients is a greater appreciation of what can realistically be achieved by this powerful tool known as investment management. We have, for historical reasons, been so totally focused on the returns game that we have been negligent in helping our clients get a real handle on what can and cannot be achieved and what the scope of potential value could be. Much can be achieved but only if those requirements are well defined and clearly mandated. So, at the start, it’s about the shift in focus to a clearly specified goal.

But there are also ways in which assets can be used to advance outcomes that exceed straight monetary returns. The inclusion of sustainable investment criteria can have a significant impact on improving the world into which members will be retiring. To highlight this, added value demands a rethink of how we could report and monitor this contribution.

Similarly, we need to think more creatively as to how we could illustrate the added value of “a steady hand on the tiller” in terms of protecting investors from the types of reactive behavioural foibles that can erode returns over time.

All of this demands that we spend far more time with clients discussing investment realities in terms of how little control we actually have over Mr. Market — but how, in the long-term scheme of things, this should not be a major impediment for them to achieve their goals if we have taken the time to set those goals correctly.

There's a lot more to investment than the bottom line. Read more about what it means to professionalise the industry, and how you can put it into practise on Enterprising Investor, a CFA Institute blog.

The “Future State of the Investment Profession” details a model for investment professionals to attain trust. What are some practical ways that it can be applied to build trust and ultimately improve investor outcomes?

It’s all about setting the right expectations — ones that you are able to then meet. Attaining a client’s trust involves being clear from the start that the business model the company ascribes to is aligned to client’s interests first and foremost. Next it demands that the starting point in the investment process be one that identifies the client’s requirements, provides a solution that has the highest probability of achieving that outcome (with clear indications around what certainty can or cannot be added), and ensures that monitoring delivery is always in the context of whether this objective is being achieved. Finally, compensation for this service needs to be better linked to value delivered ex post. In a nutshell, if a business wants to demonstrate credibility, these steps would reflect a practical application of how to achieve that.

The Future State trust model portrays how building credibility and demonstrating professionalism can lead to both trust with clients and ultimately the things that clients value.

Credibility is a not just a function of education accreditation, past performance, and experience. It includes additional traits, the most important being a solid track record of demonstrable stewardship of clients’ assets.

Maintaining credibility in the marketplace provides potential clients a reason to consider a professional or firm. It gives them some assurance that their objectives will be achieved and that their assets will be in good hands.

Professionalism deals with the attributes and values that clients expect in their financial professional. In addition to competency and the skills to perform well, professionalism includes a strong ethical foundation, a fiduciary mindset, and a strong and proactive client focus.

These concepts are all inextricably entwined. The Future State model asserts that trust and value are reflexive and build on each other. This is the same with professionalism and societal benefits. One necessarily leads to positive outcomes in regard to the other.

What should leaders in asset management companies be concentrating on when it comes to transforming culture?

The purpose of asset management firms should be to improve client outcomes, and that requires building a culture that is truly client-focused. To do this, leaders need to identify whether the systems and structures are in place to translate mission into values, into behaviours, into habits, and then outcomes. To accomplish this transformation, leaders should consider the following:

  • Make a serious critical assessment of your current business model to determine how well aligned it is to delivering on client needs.
  • Consider how you set out your mandates with your clients. Make sure they thoroughly cover what client expectations should be and when to know if you are winning or losing. Changing your mode of mandating, monitoring, and reporting will be key here.
  • Completely rethink how you go about hiring future investment professionals — think hard about the criteria that’s required in identifying the right candidates — especially in regard to inculcating the right measure of fiduciary responsibility.
  • Reconsider how to reward the behavior of your professionals to ensure that their rewards are aligned to the behavior you require.
  • Make sure that senior management “walk the talk” and don’t just disingenuously repeat these beliefs when the client is within earshot.

How do investment organisations face the practical issue of putting investors first and balancing fiduciary responsibilities with potential conflicts of interest within the context of their own organisational sustainability?

I think it all boils down to the business model. If the business model does not provide room to manage the potential conflicts, then this notion of ‘putting clients first’ is just marketing noise. And eventually, clients will find you out.

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