THE BLOG
04/09/2013 08:22 BST | Updated 03/11/2013 05:12 GMT

Can We Trust What We Can't See?

In the age of technology, social media and digital communications we are beginning to lose the sense of a 'human face' in our interactions. Is it possible to be 'friends' with someone you've never met? Is it possible to develop a relationship with an organization? More importantly, a question that we are more recently asking ourselves at CFA Institute, is it possible to trust one?

It is well known that the general public hold the finance sector in poor regard, and would rank the investment industry much lower than most - in some polls, even lower than the oil or tobacco industries - for trust. This is of course dangerous for the industry and economy for a variety of reasons, including lowered levels of personal savings and investment, but what do the larger scale investors think?

We asked Edelman, authors of the annual Edelman Trust Barometer, to find out what retail and institutional investors thought about investment professionals in the US, UK, Hong Kong, Australia and Canada - and the results have been fascinating.

One of the most interesting findings was the much higher levels of trust investors hold for their investment managers than for the institutions those mangers represent, or for financial regulators. Ultimately, that personal relationship is what counts - even where they may little confidence in a financial institution, investors tend to trust the individual handling their investments.

We also asked investors what criteria they use to choose asset or investment managers. The top attribute selected was 'trusted to act in my best interests', while 'ability to achieve high returns' placed first by just 17% of investors. When asked more specifically what attributes help to build trust in that manager, the responses focused on behaviours such as transparency of results, clarity of reporting and ethical compliance, while 'strong performance' was only ranked as the sixth most important factor, followed by fee structure.

This does not reflect the relatively common public perception that investors want to see high returns via any means necessary. Instead, investors accept an element of risk around the actual performance of their investments, but are not willing to compromise on selecting an investment manager who they trust.

Trust of investment management firms, however, is fragile, with only 53% of investors trusting them to do what is right. They also ranked firms as the least likely group to take action to restore trust in the sector - possibly disillusioned as a result of years of inactivity by firms and fresh scandals coming from leading institutions.

So how can the industry harness the trust that investors have in their investment managers to build greater confidence in the firms they represent, and demonstrate that firms are capable of effecting change from within for the betterment of the future of finance?

The bottom line is that performance alone is not enough to win the trust (and indeed the business) of investors. Listening to the investors we surveyed, we have identified three core areas for investment professionals to take on board:

Transparency - clearly communicate both successes and failures, disclose potential conflicts of interest and flag issues on the horizon at an early stage. This also includes transparency over fee structures and clear explanations of investment processes and levels of risk.

Demonstrate integrity - adhere to codes of conduct, ethical and performance standards and set high levels of standard practice, following internal or external organisation guidelines. Any regulatory violations should also be fully disclosed.

Communication - investment professionals must maintain regular dialogue with their clients throughout the investment process, not just when results are in. Reporting should be clear, consistent and comprehensive. CFA Institute's own Principles for Investment Reporting call for basic elements of reporting including transparency of risk, observation of processes and policies, full fee disclosure, adhering to client preferences and agreement on the purpose of reporting.

It is no longer possible for leaders of organisations to hide behind the brand of their institution when mistakes are made. This does not win the confidence of investors and will do long term damage both to the client base and in increasing calls for regulatory interventions in the sector. CFA Institute has developed a Statement of Investor Rights as a guide to the conduct that investors should expect from investment managers, which if followed in the industry would go a long way to enhancing reputation and results.

Many aspects of the investment management business have evolved into what is now a highly sophisticated, globalised and technologically advanced system, but fundamentally personal relationships remain at the heart of sensitive, instinctive issues like trust, and it is vital that the investment industry does not lose sight of that.