The global head of the CFA Institute, Paul Smith, has urged the investment community to embrace professionalism and “renounce profit maximisation” as two critical steps towards restoring trust with investors.
Speaking at the CFA Societies Australia Investment Conference in Sydney, Smith (pictured) described the investment management industry as being at “something of a crossroads”.
“Trust is at an all-time low; investors don’t really seem to appreciate the value we offer – we perhaps don’t do a very good job of explaining the value of what we do as professionals; and so the institute has made that a priority,” he said.
“It’s not about trying to lecture people about how do we increase trust, but really saying without trust between ourselves and our investors, how can we possibly build a sustainable investment business going forward?
“And how can we do that unless we put investor interests first?
“All of that is really based upon building a positive culture, based on ethics, market integrity and high standards of technical excellence.”
Smith said the need for investment to be accepted as a profession is particularly pressing in Australia, where the vast majority of Australians “hold a piece of the financial system through superannuation”.
Prevention better than cure
Smith said prevention is “much, much better than trying to cure and…each of us have a part to play trying to build that sustainable investment business and really doing that through high standards of ethical culture”.
Smith said the absence of an ethical culture generally leads to greater levels of regulation, and nowhere is that more apparent than in Australia.
“There’s lots going on in the regulatory environment, and I would agree that good regulation is absolutely vital to the proper functioning of a market, but without a cultural core, without ethics at the core of what every business does, regulation can only go so far,” he said.
Smith said a fist step to improving culture is to set “high standards of entry into this profession, if indeed we are to have one”.
“I have always thought that ASIC sets the bar way too low for entry to this profession,” Smith said.
“We also don’t insist on the credentials that we do have out there as being 100 per cent necessary for all practitioners. If you think of doctors and lawyers and professionals and others that we each would recognise as such, credentialling isn’t an option, it is a necessity. So the first point is we have to stand up and believe in the credential we have and insist upon that credential for all participants who are managing money on a fiduciary basis.”
Business aligned with investor outcomes
Smith said business models have to be aligned with the objective of “achieving investor outcomes”.
“We need to reorient ourselves towards being a profession,” he said.
“A profession sells a service; it does not sell a product. We need to put our investors first. We also need to decide that if we’re a profession, one of the core elements of being a profession is you renounce profit maximisation.
“That sounds a little hokey but it’s an important point. When you go to see a doctor, the doctor doesn’t advise you from the basis of what is going to make she or he the most money, they advise you from the basis of what is best for you.
“So profit maximisation, if that is the end goal of ourselves as an industry, then we can never aspire to that standard of professionalism and we will always sell out clients short.”
Smith said appropriate and more transparent fees as also necessary to nurture a profession. And the industry needs to engage with regulators to strive for regulation that aligns the interests of investment management businesses with the interests of clients “and set high standards of fiduciary responsibility”.
Smith said CFA Societies Australia’s advocacy team has set out three goals to help members move along the path to professionalism.
“The first is to be regarded by the community as highly competent,” Smith said.
“Investors should expect really, compliance and competence from us if we’re to be regarded by the community as highly competent
“The second goal was to be acknowledged by regulators as an industry whose culture is largely self-governing. Again, coming back to the concept of professionalism, professions have that element of self-governance allowed to them by society. It’s a real hallmark. And why does society allow professions that element of self-governance? It’s because a profession is geared towards, as our mission statement says, the ultimate benefit of society.”
Smith said the third goal is for CFA members to be respected by their peers. There are currently 2500 charterholders in Australia, which is a good start but still too few.
“We need to work harder to develop the charterholder community,” he said.
Tools to help
Smith said the CFA Institute has more tools than many of its members realise to help develop a core culture of ethics.
“We have a lot of the tools that we need to be able to construct the ethical culture that is appropriate for the businesses that we operate in,” Smith said.
“What we are really urging businesses to do – and you as representatives of those businesses to do – is think about how you can work a process within your own organisation to develop this ethical model into an ethical roadmap for your business.”