Aug 29

Whom Do You Trust? A Brewing Crisis in Investment Management


The CFA Institute is out with its Investor Trust Study and the results are not good for investment managers everywhere.

Whom Do You Trust?

Only a bit more than 60% of institutional investors trust investment managers.

Of course, this could be a bit like the surveys that tell us the US Congress is liked by 9% of the US electorate , putting them just below cockroaches and traffic jams in popularity. However, voters seem to like their own representatives quite a lot, judging by how often incumbents get reelected).

And, since investors can indeed vote with their feet when they don’t like their managers for one reason or another, we may be able to conclude that most institutional investors like their current investment managers.

But, what that does mean is that about 40% of institutional investors just don’t trust investment managers, as a whole.

Later in the survey, we find out how important trust really is. When asked to indicate which attributes are most important when choosing a manager, “Trusted to act in my best interest” is by far and away the most important attribute (35% of respondents), followed by “Ability to achieve high returns” (17%), “Commitment to ethical conduct” (17%), and “Recommended by someone I trust” (15%).

Now, I will not comment on that ‘high returns’ attribute, since as lowly investment consultants, we know that returns, in and of themselves, tell only a partial story of performance (risk adjusted returns, attention to book yield for core fixed income, comparison to risk adjusted performance of peers, etc, are other good measures). But, outside of ‘high returns’ all of the top attributes for picking an investment manager center around this idea of ‘trust.’

I did not see the questionnaire for this survey, nor did I participate in it. So, perhaps these answers may be a bit skewed. For instance, if you tell someone your survey will focus on the idea of ‘blah-blah’, you will get a lot of answers saying how important ‘blah-blah’ is. That is just human nature.

But, it cannot be denied that trust is key in any successful relationship among we humans. What does that trust entail for institutional investors?

The survey notes the top attributes that build trust in an investment manager as:
Has transparent and open business practices                 53%
Takes responsible actions to address an issue/crisis     52%
Has ethical business practices                                            51%
Delivers consistent financial returns                                 48%
Offers high quality products or services                            47%

OK, we will ignore the obvious item about ‘delivers consistent financial returns,’ since it really could be applied to Bernard Madoff, as well as other practitioners of the scheme of Ponzi.

But transparent and open business practices, per the Survey’s authors means:
– Articulating triumphs and failures
– Clearly disclosing unavoidable conflicts of interest
– Bringing potential issues to the forefront early and often

One of these reminds me a bit of what an old boss of mine once told me: “I don’t mind bad news,” he said, “as long as you are honest and tell me about it right away.”

Conflicts are rife in many business environments, but they can cause major issues in the investment arena. So, disclosure and understanding those conflicts is very important.

And, as stated over the years in this blog, I am amazed at how often every manager’s performance is always shown in the top quartile. A mathematical impossibility if analyzed fairly, since everyone cannot be well above average….except of course, in Lake Woebegone.

But, what can a manager do to change the perception that about 40% of institutional investors have of them?

We’ve said this in an earlier blog, but we’re back to managers self-identifying as being in compliance with the CFA Institute Asset Manager Code of Professional Conduct. Of the managers with the most insurance assets under management, only one has self-identified. Wow!

There are other suggestions noted in the survey, to which I would also agree (see page seven of the Executive Summary). However, one suggestion is paramount and is summarized by one simple philosophy “Put Clients First.”

I am proud to say that our firm, Strategic Asset Alliance, has operated on that philosophy from the start. And, more importantly someone much, much smarter than me, Charles Ellis, has written as such in his latest book “What It Takes: Seven Secrets of Success from the World’s Greatest Professional Service Firms.”

Will investment management firms take this Investor Trust Survey to heart and act on its important suggestions? Or will some see the Survey as conflicted in itself and ignore many of the findings (since the CFA Institute has an agenda of improving the ethical profile of the investment management industry)? Or will some simply see many of the suggestions not feasible within a cost/benefit analysis framework?

My suggestion would be for managers AND consultants to heed the advice. And, in the case of consultants, we should decide how to utilize it effectively both when evaluating managers and our own consulting firms.