It is now six years since the beginning of the 2008 global financial crisis and one of the many casualties of that difficult time has been the damage done to investors’ perceptions of the integrity of the investment management industry.
While Canada has fared better than many other countries, the headlines of global investment bank self-dealing, LIBOR rate rigging and mortgage fraud have tarred the industry in general. Not surprisingly investor trust isn’t what it used to be. At the heart of any investment transaction is trust; trust that counterparties will fulfill their obligations, trust that parties to the transaction are not in conflict with investors’ interests and trust that information is not false or misleading.
In August 2013 the CFA Institute and the firm Edelman Berland released their Investor Trust Study which was based on a survey of 2,104 retail and institutional investors in North America, Europe, Asia and Australia. The study compiled feedback from asset owners only, as financial intermediaries were excluded and confirmed that just 53% of investors in the U.S., U.K., Hong Kong, Canada and Australia trust investment firms to do what is right. As a point of reference 60% of the same respondents said they trusted the pharmaceutical industry to do what is right. Trust of the investment industry was especially weak with retail investors at 51% as compared to 61% for their institutional counterparts. The underlying capital markets fared better though as 73% of the respondents felt that capital markets offer fair trading opportunities.
The brunt of the distrust was with the industry itself and just 15% of the respondents expressed a great deal of trust (the highest of the ranked survey responses) in the investment management industry.
The Investor Trust Study underlined that investors want their interests respected. The single most important factor considered when investors were making the decision to hire an investment manager is trust that the investment manager would act in their best interest. Achieving high returns was named only half as often and competitive fees were only cited a fifth as much. The investment management industry has long differentiated its products on the basis of performance and price but financial advisors really need to change the dialogue they are having with clients in order to overcome the dramatic decline in trust since the financial crisis.
Both clients and advisors fondly recall the bull market in equities from 1982 to 2000 where being up 12% was considered normal but the world has changed. Advisors need to shift from talking about the competitive world of returns to focusing on client goals, concerns and priorities. Conversations with clients should not emphasize market performance but instead measure how close they are to attaining personal goals and preserving their lifestyle.