Five reasons retail investors need transparency from investment firms

Investment firms must be prepared to open their doors and let their customers see their inner workings

Nick Pollard
Published: 15, Mar 2019

Nick Pollard is managing director for Asia Pacific at CFA Institute where he is responsible for working with all CFA Institute stakeholders, increasing the number of candidates entering and moving through the organisation’s credentialing programs, and working with institutional partners (employers) throughout the region. He is a seasoned wealth management and banking executive and skilled at growing businesses in Europe and Asia. Previously, Mr. Pollard was CEO of The Royal Bank of Scotland’s Coutts Asia division and, most recently, he was the head of International Learning and Professional Development for Coutts International.

Image: Shutterstock
Image: Shutterstock

Investors’ trust in an investment firm is a significant factor in their decision to hire an adviser. We need to work hard on what we call the 'trust equation', which consists of two critical elements: Credibility and professionalism.

1. Trust: The most important factor
Last year, CFA Institute published its third global study on trust called The Next Generation of Investor Trust. We discovered that the nature of trust is changing because of the perceptions of a new generation of investors. Overall, trust in the financial industry among investors--both institutional investors and retail--has risen since our last survey in 2016. While this is good news, it also brings new challenges.

With greater transparency comes higher trust but also, higher expectations. That, of course, means that investment firms must be prepared to open their doors and let their customers see the inner workings of their firms.

Our survey polled more than 3,000 retail investors and 800 institutional investors from 12 markets, including India. India scored the highest level of trust, at 71 percent. The reasons why the remaining 29 percent distrusted firms ranged from perceptions of high fees, poor investment advice and concerns about unscrupulous advisers.

2. Understanding the risks
One primary responsibility of a professional investor is risk management. But where does risk come from? Investment firms need to help their customers understand economic and investment cycles. At certain points in the cycle, investors need to understand the relationship between risks and its prospective returns, and what their appetite is for taking on risks.

3. Meeting expectations
Investment goals can vary significantly by age group or geography. Indian investors surveyed in our recent study were much more likely to have a financial adviser than those in other markets. Although trust is still the most important factor in choosing an adviser, Indian retail investors are also, and unsurprisingly, strongly motivated by a desire for performance.

The top two reasons Indian investors are likely to leave their financial adviser are under-performance and a lack of communication and responsiveness.

4. Restoring faith in the industry
The public’s faith in the financial services industry has been sorely tested over the last decade or so. Restoring that trust requires a renewed focus on accountability, especially when it comes to financial misconduct. Statistically, the most common form of misconduct we see involves misrepresentations or omissions of material facts. These cases often involve investment firm’s failures to adequately disclose to clients actual or potential conflicts of interest, or the risks associated with an investment or strategy.

Investors want regular, clear communications about fees and upfront conversations about conflicts of interest. The biggest gaps between investor expectations and what firms provide relate to fees and performance. Clients want fees that are structured to align to their interests, are well disclosed, and fairly reflect the value they are getting from their investment firms. Indian investors also place high importance on brand, so firms would do well to note the value in maintaining or building recognition among their target audiences. In terms of building trust, adhering to a code of conduct is also an important component of the client relationship in India.

5. Smart decision making
Finally, investors want full disclosure on all financial information, so they can see what is driving the decisions of their investment advisors, which, in turn, helps them make their own decisions. This also enables them to make comparisons with other investment firms on a like-for-like basis.

The author is Managing Director for Asia Pacific at CFA Institute.

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