Apr 27

Is Putting Investors First the Future of Finance? It Better Be


Recently, the CFA Institute began an important new initiative called the Future of Finance.  It was the result of an important study that the Institute conducted earlier, and that we discussed in this blog back in November, 2013: “Whom Do You Trust? A Brewing Crisis in Investment Management.”

Basically, the Future of Finance consists of 50 ways to restore trust in the investment industry.  Why this initiative now?  That study showed that, even among institutional investors, 40% do not trust investment managers.  Of course, we must assume they do trust their existing managers, else those managers would be replaced.

However, the sight of investment professionals being considered near the bottom of the ‘whom do you trust’ list of occupations makes one ponder.  What could be the reasons?  Numerous examples of immoral if not illegal activities?  Unaligned incentives, also called the agency problem, where the manager and investor have different incentives?

What is the Future of Finance?

Well, the CFA Institute’s Future of Finance initiative focuses on six areas to tackle this problem:

–   Putting Investors First
–   Financial Knowledge
–   Transparency and Fairness
–   Retirement Security
–   Regulation and Enforcement
–   Safeguarding the System

Did you know that this month is Putting Investors First month?

I did not either, until I attended the CFA Annual Conference.  Of course, less than 2% of CFA’s attended, but that still meant nearly 2,000 got the message directly.

How Can You Put Investors First?

Putting Investors First includes:

–   Statement of Investor Rights
–   Asset Manager Code of Professional Conduct
–   Fee Structure Guide for Investors
–   Board assistance in the form of a self-assessment tool and best practices guide

We highly endorse these actions, but are deeply concerned that they have not been more quickly and forcefully adopted by the investment industry.

For example, there are many investment managers who are knowledgeable about investments for insurers, yet have not yet adopted the Asset Manager Code.

Also, with investments and the investment process becoming more and more complex, I wonder how many investment managers know that their clients fully (and I do mean fully) understand all salient aspects of an investment and how it impacts their portfolio.  You can find that imbedded in the Statement of Investor Rights.

The Principles of Investment Reporting

Of course, each of those six areas has their own details and investment professionals would do well to take all of them to heart.  One of my favorite details is the Principles of Investment Reporting.  Item four is: “Clear and transparent presentation of investment risks and results.”

If that is true in all instances, why do Strategic Asset Alliance and InsurerCIO spend so much time in crafting investment reports that focus on those key risks and results, while many manager reports may not be similarly focused?

One possible answer:  Manager reports focus on how they see the portfolio from their vantage. Those reports help them do their job.  However, they may not always focus on the key issues that are unique for your insurance company.

The Future is Up to You

Nevertheless, the most important point remains.  It is incumbent upon all investment professionals to internalize the key activities and responsibilities inherent in the Future of Finance initiative.  And, it is even more important that investors require such compliance.

The Future of Finance is really up to all of us.