Investors rank disclosure, ethics over returns

Individuals and institutions globally place more emphasis on transparency and ethical conduct than performance, finds a CFA Institute study exploring trust in the industry.
Investors rank disclosure, ethics over returns

Retail and institutional investors worldwide regard transparency around fees and costs, along with data security, as more important attributes in advisers than investment performance, finds a new study.

However, the feeling is that advisers and managers are not getting these basics right. Indeed, barely half of retail investors and only one in four institutions would recommend an investment firm they work with to others.

“If I was a fund manager in Asia I would be concerned,” said Paul Smith, president and chief executive of the CFA Institute, which conducted the survey exploring trust in the industry, the second time it has done so.

“The industry is competing on something that is not sustainable, and that is performance," he noted. "Actually what is important in the buying decision is transparency, disclosure and easy-to-read reports. Client service and ethical conduct is sustainable, so why not just focus on that?”

The survey*, which quizzed some 3,300 individuals in 10 countries and 500 institutions across six countries, found a slightly higher level of trust in financial services among the retail segment.

Overall, 61% of retail investors said they either trusted the industry or trusted it a great deal, versus 57% for institutions. The retail figure was 5% up on the previous survey carried out in 2013.

Smith observed that greater trust among the retail segment was contrary to the industry understanding that informed investors tended to be more trusting than the less well-informed.

But what was noticeable was the retail numbers were driven by China and India, which had trust levels of 90% and 89%, respectively. The next highest were Hong Kong and Canada, with 64%, while Germany was lowest with 40%.

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Smith suggested one factor could be that the private sector was more well respected in emerging markets than developed ones, where governments were trusted not to be corrupt and private enterprise was seen as something to be controlled. “It’s one thing we have going for us as an industry in Asia,” he noted.

At the same time he pointed out that the public in mainland China had been insulated from the pain of corporate collapse and defaults. “The general public has not yet taken a bath; moral hazard has not come home to roost,” he stated.

Interestingly, there was a big divergence between Chinese and Indian retail investor views on whether they had a fair opportunity to profit by investing in capital markets. Nearly 9 in 10 (88%) Indians said they did, versus 69% of Chinese – which was the bottom figure.

This could be explained at least partly because the survey was carried out between October and November last year, when India’s stock market had surged since 2013 while China’s was in the midst of a deep correction.

Asked whom they trusted for investment advice, 36% chose personal financial advisers, while online research was second with 21%. Media, including social media, barely figured.

Smith noted that the internet was seen as a much more important channel in Asia than the West, which he ascribed to this region being demographically younger and less sophisticated.

This became more apparent when retail investors were asked whether they would prefer a person to help guide them or the latest technology and tools. China and India were the only markets to favour tech and tools over human interaction. 

Smith surmised: “The more sophisticated a market is, the more likely investors will want help [from a person] navigating the information that is out there. In the US there is so much more product.

“The average investor in the US will be older, have been in the market longer, have better relationships and know the people to go to,” he added.

But even now, when people talk about financial technology, they still tend to reference the likes of Google and Amazon, when they should be talking about Indian and Chinese firms, argued Smith. “Players such as [Chinese e-commerce firms] Alibaba and Tencent have a big advantage because they are playing in only one market, and it is a tech market.”

When retail investors were asked what mattered to them, full fee disclosure and clear explanation of fees and costs were the highest priorities with 80% and 79%, respectively. Performance that beats peers, protects against losses and beats benchmarks were lesser – but still important – considerations.

For institutions, the top responses were: acting in an ethical manner (72%), full fee disclosure (72%) and reliable measures to protect data (71%). Then came returns against benchmark (70%) and returns against peers (66%).

In terms of where retail investors saw the widest gaps between what they wanted and what investment firms delivered, the most cited areas were (see chart): explaining fees (31pts), protecting portfolio from losses (31pts) and full fee disclosure (30pts).

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For institutions on this question, the top answer was 'fee arrangements so interests are aligned' (27pts), followed by returns against benchmark (26pts) and 'acts in an ethical manner' (24pts).

“This is a good result,” said Smith. “Institutions are less interested in performance and more in the health of the business they are working with, in ethics and transparency.”

Institutions appear to be saying that since managers are largely indistinguishable when it comes to performance, they will prioritise firms by how they run their business.

But Smith added: “The way it works in practice, most investment managers would be quite cynical about this [that institutional investors put ethics ahead of performance and fees], I would suspect.”

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* The CFA Institute, with help from Edelman, interviewed 3,312 individuals with investable assets of more than $100,000 in the US, Canada, UK, France, Germany, Australia, China, Hong Kong, Singapore and India; and 502 institutional investors in the US, Canada, UK, Australia, Hong Kong and Singapore.

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