The Certified Financial Analyst (CFA Society) announced on Wednesday that AustralianSuper supported the adoption of the CFA Asset Manager Code of Professional Conduct.
When I read a story like this, I always wonder how investor psychology has been incorporated into their thinking. Particularly the CFA Society, which is certainly across the field of behavioural finance.
We know there are biases in the way clients respond to investment information and financial choices, based on the how these are framed, sometimes with woeful client outcomes. In addition, despite some thinking to the contrary, evidence suggests that sophisticated professional investors themselves are not immune to a number of hidden psychological effects. How are these risks managed? Let’s look at the CFA code for some answers.
Question 1: How do you help manage your clients’ behavioural biases?
CFA’s code states that “managers must…communicate with clients in a timely and accurate manner …provide adequate disclosure…ensure that portfolio information is accurate and complete…ensure that disclosures are truthful, accurate, complete, and understandable and presented in a format that communicates the information effectively”. These seem like sensible minimum criteria. However, there is no mention of the impact the disclosure may have on client behaviour.
For example, research suggests that disclosing a series of 12 one-month returns on a portfolio’s underlying securities is likely to have a significantly different impact on investors than disclosing the total portfolio return over a single 12-month period.
The former option seems more likely to satisfy the code’s criteria for providing complete disclosure. However, the latter, by exposing the investor to less of the potential psychological pain of viewing investment losses, may help ensure the client remains invested for the long-term. This simple difference can increase the chances of the client meeting their retirement goals.
Question 2: How do you manage your own behavioural biases?
In terms of manager behaviour, the CFA code states that, “managers must…employ qualified staff and sufficient human capital and technological resources to thoroughly investigate, analyse implement, and monitor investment decisions and actions.” Does this mean that managers who comply with the code are assessing their investment decision-making data and the corresponding decision-making contextual clues, looking for the impacts of common behavioural patterns and biases?
The code also says: “managers must…establish a firm-wide risk management process that identifies, measures, and manages the risk position of the manager and its investments, including the sources, nature and degree of risk exposure”. I’m sure the risk management process required by the code must capture the manager’s approach to identifying and overcoming behavioural biases. To comply with the code it must have staff with sufficient expertise and resources to do this. Or perhaps, to help overcome the difficulty in identifying one’s own biases, they outsource this function to an independent specialist.
Either way, if I was relying on an asset manager to handle my money or that of my clients, I would certainly ensure it had adequate answers to these questions. And if I was an asset manager, I’d feel compelled to make sure I did.
