Event panelists Mr Ged Fitzpatrick, Senior Executive Leader – Investment Managers and Superannuation, Australian Investment and Securities Commission; Mr Damian Graham, Chief Investment Officer, StatePlus; and Mr Nidal Danoun, Director Prosperity Financial Services, examined the issue of investor trust in the context of findings on industry culture, alignment: regulation and transparency and competency versus compliance sourced from CFA’s ‘From Trust to Loyalty: a Global Survey of What Investors Want’ (see note 1).
The event was moderated by Mr Anthony Serhan, President CFA Society Sydney and Managing Director, Research Strategy at Morningstar.
Culture: focus at individual, organizational and whole-of-industry level
Mr Serhan noted that one of the key findings of the survey that differentiated Australian retail investors from their global peers was the trust they placed on individuals working within the system who they felt they could count on, not on a firm brand.
‘An organisation’s brand is basically its culture,” he said. “Investment is about people, and nowhere is this point more valid than in this country where every adult Australian is an investor through mandated superannuation. Even as institutional investors, we are all fundamentally intermediaries who manage money from retail land where ‘who’ has guardianship of their money is what matters.”
Mr Fitzpatrick said that the individual within the financial services system was only a component of the whole.
“Certain obligations to investors definitely sit with the individual but firms comprise an institutionally structured set of behaviors and these also count in the discussion on culture. Also, structural incentives within industry may define culture and sometimes require regulatory intervention to address those structures. So while the individual is important so are the broader cultural objectives of the firm and the industry.”
Mr Graham noted that culture should be number one in terms of identifying providers within the system.
“It’s really important to understand how an organisation thinks about alignment, agency risks and potential ‘leakage’ points. We need to have confidence that providers are thinking about these issues in a balanced manner, in a way that demonstrates strong cultural integrity.”
He also raised the effectiveness of risk culture audits in raising awareness of cultural weaknesses within a firm.
“Cultural audits can be valuable in determining how an organization and the individuals who work for it view risk from every perspective, and the impact their risk associated behaviors have on the end investor,” he said. “It can be a confronting process but an important one, the outcome of which is very insightful in terms of learnings and opportunities.”
Advice must be about investor objectives
The survey found that only 52 per cent of Australian retail investors used a financial adviser, 9 per cent below their global peer group.
All panellists believed that the research was very generous in terms of the real number of retail investors who used advice, believing the figure was more likely to be as low as 20 – 25 per cent in Australia.
Mr Danoun said the issue centred on the investor knowing what they wanted or needed versus the cost of getting advice on how to get it.
“The concept of fiduciary duty is not new and product has nothing to do with it. The key is for the adviser to act in the client’s best interest and discharge their duty of care. Therefore, what we see with elements of transactional-type advice in particular, where advisers ‘reverse engineer’ client’s goals and objectives to fit a specific product, where it becomes quite problematic in terms of acting in the best interest of the client,” he said.
“As an example, longevity and legislative risk are big threats to investors who may not understand what they are and their impact. However, the question is: are they willing to pay for advice on how to deal with them in particular where there is no product recommendation associated with the advice? This is why conflicted remuneration has always been an issue in the advice space and, in terms of access to advice, it will be interesting to see if robo advice improves access by reducing costs.”
Transparency enables investor knowledge, empowerment and trust
Mr Serhan noted that the survey found that only 50 per cent of Australian retail investors trusted businesses in financial services to do what was right compared to their global peer group finding of 61 per cent.
“As a country, Canada (64 per cent) is an interesting comparison. Canada, predominantly bundles advice fees into the product and, as a result has some of the most relatively expensive equity funds compared to Australia. However, in this study Canada has one of the highest penetrations of advice and Canadian investors have a higher level of satisfaction than Australian retail investors. So has FOFA worked?” he asked.
Panellists agreed that the issue was one of transparency.
Mr Fitzpatrick said that people had the right to know what they were getting and an insight into the real value of their overall package.
“What’s happened domestically, hasn’t necessarily happened in other jurisdictions so the level of transparency isn’t there and it may be difficult for an investor to take a view on what constitutes ‘value’. Once you start to unbundle the package the way we have here, then investors automatically start looking at whether each component and each fee is providing value in line with their expectations. Australia is more developed in this sense and FOFA is important; however it requires fundamental changes to underpin it and this is where culture comes in,” he said.
Mr Graham believed the investor’s view of value was the most critical piece.
“Transparency is a value discussion, not just a compliance discussion, and understanding what investors think about the value of service is critical. High quality providers haven’t struggled in this context post the introduction of FOFA, which shows they are better at being transparent and explaining the value investors are getting from them.”
Mr Serhan concluded the event by saying that the findings of the survey had importantly identified differences between what investors want and what industry was delivering.
“There’s been a lot of work in the past few years to address the issues but industry still has some very obvious calls for action that it still needs to address.”
CFA’s ‘From Trust to Loyalty: a Global Survey of What Investors Want’ events were part of CFA Institute’s global ‘Putting Investor’s First’ month, which took place across 148 countries during the month of May.
Notes
1 Australian retail investors with USD 100,000 or more in investable assets
