Do You Trust Your Financial Advisor?

To build an enduring investment business takes more than brains and toughness. Success starts with values that clients care about most -- starting with trust.
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When an investor initially meets a financial services advisor, what is the first order of business? Establishing a relationship of trust, it turns out, is at the top of the list. Investment performance, rules and regulations, the name of the advisor's employer, and other "hard" factors take a back seat to the value of trust. Trust is the glue that holds together relationships and, as a human system, the financial markets as well. Without trust, the wheels of our economy turn more slowly, less efficiently.

Many talk about the need to restore investors' trust in capital markets and the profession, but there has been little discussion about just how to go about this. With this in mind, CFA Institute partnered with Edelman to develop the Investor Trust Study, which examines the dimensions that influence trust among both everyday investors and professional investors. The results provide some valuable insights into how to restore confidence in the investment industry.

Clients' trust in the investment management industry is fragile, with only half (53 percent) of investors believing investment management firms will do "what is right." The Study also reports that retail investors are less trusting of the industry than their institutional counterparts (51 percent vs. 61 percent, respectively). While some may be pleasantly surprised that investors' measurement of trust is not lower, this is no time to celebrate. When we think of other relationships built on trust - friendships, marriage, legal advice - all are destined for failure if the trust and confidence runs about 50 percent.

This limited amount of trust reflects a lack of confidence in the broader financial services industry. Hit by the shock of the 2008 financial crisis and ongoing scandals around money laundering, rogue trading, rate manipulation, and insider trading, the industry lost the faith of its key constituents - the clients, investing public, and other participants that help it function on a day-to-day basis. This is coupled with a long history of inadequate regulatory enforcement, lengthy delays in bringing wrongdoers to court, and a willingness to allow financial services industry titans and their firms to pay fines without admitting wrongdoing. Investors can show displeasure by taking their savings elsewhere, but sometimes even that is difficult to do when you factor in lockups, exit fees and decimated portfolios where clients feel like it no longer matters.

Based on our Study, investors were very clear about what it takes to grow trust going forward. Interestingly, what was not at the top of their list was strong performance. Investors who responded to the Study indicated other factors: transparency, the investment manager's ability to act responsibly when there is an issue or crisis and committing to ethical business best practices that put investors first. Other factors, such as consistent performance, quality products and highly regarded firm leadership, all paled in comparison.

The Study also reported that investors expect governments to improve oversight and enforcement within the capital markets and thereby trust in those markets. However, it is also up to investment professionals and their firms to take action because investors say the investment management professionals they deal with have been the most effective in enhancing their trust, citing their investment managers - ahead of their investment firms, national regulators, and global regulators.

How does the investment community move forward? Start with a firm-wide culture that puts the clients' interests first, with no exceptions. Be transparent. Demonstrate integrity. Communicate early and often. Lastly, learn more about how you can join the CFA Institute Future of Finance campaign, which is creating positive change in finance through programs such as the Statement of Investor Rights that advises buyers of financial service products on the conduct they are entitled to expect.

To build an enduring investment business takes more than brains and toughness. Success starts with values that clients care about most -- starting with trust.

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