There Is a Future of Finance (And It's Called Fiduciary Capitalism)

Earlier this week, over 1,800 investment professionals took time out to visit Seattle for CFA Institute's 67th Annual Conference. This was an important opportunity to join an initiative that is about the future of finance and shaping an industry that better serves society. Education has a crucial role to play in helping to restore to financial intermediaries a greater sense of social purpose, and that's why CFA Institute and other professional organizations exist. A new mindset, one we could call fiduciary capitalism, is worth considering . The leaders here will likely include institutional investors - pension funds, endowments, foundations and sovereign wealth funds - as well as early adopters in the fund management industry. Based on a duty of care and loyalty and the obligation to place the needs of their beneficiaries above all other considerations, these investors share an agenda.

Fiduciary capitalism is well-situated to take on a leadership role for three major reasons: size, technology, and the priorities of major institutional investors. The top 1,000 such fiduciaries worldwide account for $25 trillion, which is more than half the world's equity market value. When these institutions act together, as they increasingly do in matters of corporate governance and market structure, they can shape the financial markets into the form they desire.

Second, technology has leveled the playing field. For decades, there was an asymmetric information advantage confronting institutional asset owners doing business with brokers and investment banks. That information gap, by and large, is gone. The digital age has put as much computing power and market access into the hands of large fiduciaries as in the hands of brokers and bankers and lessened their dependence on third parties for information to help them make decisions.

The third driver of this new era is the agenda of these fiduciary capitalists. To many fiduciaries, things like market outperformance, an information "edge," trading, flow, and league tables matter far less than delivering the returns required by their ultimate beneficiaries. Trillions of dollars are now managed by sovereign wealth funds that have social outcomes as drivers of their behavior. What's more, many asset owners (e.g., endowments) are "permanent" funds. They have come to realize that their beneficiaries 50 or 100 years from now will inherit not only the profits but also the negative externalities of the investments made today.

That long-term orientation is one of the main reasons we can look to fiduciary capitalism as a source of inspiration. Under fiduciary capitalism, corporate management teams should have longer-term owners of their shares and in turn will be measured by for lasting performance and for the true environmental and social cost of their activities. Truly patient capital, which takes into consideration the total costs and benefits over many years of a business strategy, will drive talent and innovation in finance.

But for fiduciaries to truly bring about an era of reform and rebuilding, institutional investors will have to get better about providing their beneficial owners with more information about their activities, fees and performance. Governance needs improvement and financial firms will need to figure out how to partner with these fiduciaries beyond acting in a traditional money manager or consultant role.

The future of finance should be less about leverage and financial engineering, and more about efficiently connecting capital with ideas, about long-term investing for the good of our world, and about the world we pass to future generations. In the public policy arena, governments that promote long-term savings, reduce taxes on long-term ownership, and require transparency and good governance can help hasten this welcome change in our financial markets.

Since putting the interests of investors first is at the heart of that shift, we have launched Putting Investors First Month worldwide throughout the month of May. This global initiative calls attention to the needs and rights of investors, and unites financial professionals committed to placing investor interests above all others. The event kicked off on May 1 in New York and Chicago, and will continue in 54 cities around the world with a series of events and outreach hosted by more than 35,000 investment professionals and many of our 143 member societies.

The financial industry and investors alike will benefit from efforts like these as an era of fiduciary capitalism emerges.