ARX Series 18 June 2020
Earning Investors' Trust
How the Desire for Information and Innovation Shapes Client Relationships
CFA Institute's 2020 investor trust survey, fourth in a series, gauges the perceptions of investors toward the behavior of investment firms and professionals who are entrusted with their money.
Publisher: CFA Institute
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What does it take for someone to put their capital at risk and entrust their funds to someone else to manage? The concept of trust lies at the heart of this question.
Trust is a multi-layered concept, and it is essential to the proper functioning of capital markets. Without it, financial interactions would become more inefficient and costly or cease altogether. In this fourth edition of the CFA Institute investor trust study, we examine how trust in the industry has evolved, while the essential characteristics of trust endure.
The essential enduring feature that is often missed is that trust is made up of qualities from the two sides of the relationship—the client’s willingness to trust and the institutional investor’s worthiness of trust.
We explore two specific types of trust relationships in the investment industry—institutional investors engaged as clients of asset managers and retail investors engaged as clients of investment firms.
Several layers of investor trust—in the financial system, in the financial services industry, and in investment firms—affect how investors view their investments. Investment professionals must understand these influences and their interactions in order to build effective client relationships.
Three themes are contributors to investor trust today: Information is essential for trust, and the less investors feel informed, the less they trust the financial system. Investors become better informed through information and knowledge derived from financial education.
Innovation and the proactive use of technology can enhance trust, and those who trust the financial system more are also more likely to be early adopters of innovative products and technologies.
Investors’ desire for influence and control is growing and provides opportunities for the investment industry to strengthen trust. This desire is evident in expectations for greater customization—in communications, investment design, and products such as those that incorporate environmental, social, and governance (ESG) factors. Investors are also seeking more control over net-of-fee performance results by negotiating fees.
The two major components of trust are credibility and professionalism. Credibility factors can be thought of as observable signals of trust. They are relatively straightforward to identify and provide mental shortcuts to indicate a trustworthy person or organization. Credibility can be demonstrated and earned, but it can also be assigned by a trustworthy source. This “outsourcing of trust” is particularly evident among millennial investors. In contrast, professionalism is more subjective and less easily observed and assessed because it is about mindsets. Notably, the outcomes are both trust and value since these are inextricably linked. Trust cannot exist without value, and value creation without trust is unsustainable.
Authors
Rebecca Fender, CFA, is the Chief of Staff for the Research, Advocacy, and Standards area of CFA Institute. She provides strategic analysis and partners with key stakeholders to develop and implement initiatives, processes, and metrics that will improve the team’s effectiveness.
Previously, she was a member of the industry research team and the founder and leader of the Future of Finance initiative. As the thought leadership platformforCFA Institute, her group published studies to help investment professionals build their careers and serve their clients more effectively.
Ms. Fenderhas testified before the U.S. House Financial Services Committee AI Task Force on the impact of artificial intelligence on investment roles. She speaks regularly at industry events and has been quoted in the Financial Times, Bloomberg, and the New York Times, among others.
Prior to joining CFA Institute, Ms. Fender was a vice president at BlackRock working with pension funds and endowments, and she also worked at Cambridge Associates, where she published research about manager selection. She earned her undergraduate degree in economics from Princeton University and holds an MBA from the Darden School at the University of Virginia.
Robert Stammers, CFA, is director of Investor Engagement on the Future of Finance team for CFA Institute. Prior to joining CFA Institute, Mr. Stammers was the principal for his founded company, where he consulted to aide real estate owners, lenders, and syndicators, develop and analyze structured real estate investments.
As a senior executive for several institutional fund managers, Mr. Stammers was the portfolio manager for a $1 billion enhanced real estate fund, a $1.2 billion private timber fund, and several pension fund separate accounts.
Mr. Stammers has his bachelor of arts in economics from Connecticut College, his masters in business administration from Emory University, and was awarded the CFA designation in 1997.
Roger Urwin is global head of investment content and advisory director at Towers Watson. Previously, he was global head of its investment practice and worked at William Mercer and Gartmore Investment Management. Mr. Urwin is the author of a number of papers on asset allocation policy and manager selection and serves on the board of the Institute for Quantitative Investment Research and as advisory director to MSCI. He holds a master's degree in applied statistics from Oxford University and has qualified as a fellow of the Institute of Actuaries.
Rhodri Preece is Senior Head, Research for CFA Institute and is responsible for leading the organization’s global research activities and publications, managing the research staff and collaborating with leading investment practitioners and academics. CFA Institute produces the highest-calibre research on issues and topics most relevant to the investment industry, including rigorous in-depth research, forward-looking thought leadership content, applied investment insights, and commentary on trending investment topics.
Rhodri previously served as head of capital markets policy EMEA at CFA Institute, where he was responsible for leading capital markets policy activities in the Europe, Middle East and Africa region, including content development and policy engagement.
Mr Preece is a current member of the PRI Academic Network Advisory Committee, and a former member (2014-2018) of the Group of Economic Advisers of the European Securities and Markets Authority (ESMA) Committee on Economic and Markets Analysis.
Prior to joining CFA Institute, Mr. Preece was a manager at PricewaterhouseCoopers LLP in the investment funds group (2002-2008). He has a BSc and a MSc in Economics and is a CFA charterholder since 2006.