The finance industry must put investors first again to regain the trust that was lost following the financial crisis and fraud scandals, speakers at the Cayman Investment Forum said last week.
Ashvin Vibhakar, senior adviser of the CFA Institute’s Future of Finance Project, said negative attitudes toward the financial industry are stifling innovation and result in added costs to society. He quoted the 2013 Edelman Trust Barometer of trust in business, government, NGOs and media across 25 countries, which sees the financial services sector as the least trusted industry, trailing even banks.
Another survey commissioned by the CFA Institute in cooperation with Edelman and released in August found nearly half of 2,100 retail and institutional investors surveyed in the U.S., U.K., Hong Kong, Canada and Australia did not trust the investment industry.
Moral behavior and the stewardship of societal assets are needed to restore the trust in the industry, Mr. Vibhakar said Thursday at the conference. “The main issue is to act in the interest of the investor.”
He called on investment professionals to ask themselves every day, “How is my client doing? How is the company that I work for doing? How am I doing? In that order.”
The survey results also showed that the single most important factor in making a hiring decision for investors is the confidence they place in an investment manager to act in their best interest. Achieving high returns was cited only half as often, and fees only a fifth as much.
A CFA membership survey, meanwhile, revealed that more than half of all CFA charter holders worldwide saw the lack of ethical culture in the financial firms as the main reason for the lack of trust.
The cultural shift demanded by investors in the surveys away from the sole focus on performance-based standards toward ethical behavior requires investment managers to be more transparent, demonstrate integrity and communicate clearly to restore trust in the industry.
Mr. Vibhakar outlined industry efforts to establish transparent performance standards and agree fixed principles for investment reporting. The CFA Institute has also drawn up a statement of 10 investor rights which should govern the relationship between investors and financial professionals and their organizations.
The rights encompass the fair, honest and objective treatment of the investor, clear communication and tailored investment advice based on a proper understanding of the investor’s circumstances, as well as transparent and appropriate fees and confidential recordkeeping.
Noreen Harrington, a former senior executive with Goldman Sachs and Barclays and hedge fund professional, agreed. “It has to be about the investor. Everything else will fall into place,” she said.
Ms Harrington, who became known as a whistleblower in the U.S. mutual funds scandal, told investment professionals at the conference, “I am no different than you.”
She said she wanted to share her experience and the “unbelievable situation” she found herself in, because “it could be you.”
When working for the family office of the family of business magnate Leonard Stern in the early 2000s, Ms Harrington became suspicious of unusually high returns of a hedge fund managed by the son Eddie Stern.
She suspected that he offered mutual funds to park significant sums of the family’s money with the funds in return for the right to trade late. While some funds declined, others agreed even though the late trading would diminish the return of the investors in the funds.
“By coming in and buying $100 million to $200 million every day, he diluted all our profits.”
The funds agreed to the transactions to drive up their commissions, based on assets under management, which grew as a result of the arrangement. The late-trading itself was of course illegal.
“It was like betting on a horse race that was already run,” Ms Harrington said.
Although she felt it was grand larceny, she said it was not easy to report the crime. But she ultimately informed the office of New York Attorney General Elliott Spitzer of the fraud and subsequently held talks with the SEC about why she had not reported it to them first. In these discussions, she encouraged the SEC to protect whistleblowers and be more open, saying others should not have to go through what she had to do.
‘Raise the issue’
Ms Harrington encouraged investment professionals to act like she did, when they feel something is wrong. “If you ever feel in your gut something is not right, raise the issue.”
The industry would have to police itself to improve its image, restore trust and avoid overregulation. “If we don’t lead in a crisis, new legislation will come in that is not perfect,” she said.
She also argued that settlements and penalties without the admission of wrongdoing, a common outcome of financial investigations, have to end. In an industry that pays very well for a job well done, the consequences for fraudulent actions need to be higher, by blocking future employment in the industry for certain transgressions and imposing jail time for the most egregious offenses, Ms Harrington said.
Mr. Vibhakar and Ms Harrington were two of the speakers at the Cayman Investment Forum held by the CFA Society Cayman and Vanguard on Oct. 17 at the Marriott Grand Cayman Beach Resort.