The past half-decade has been one of the global financial industry's most challenging.
John Rogers, president of the CFA Institute, said in a recent luncheon in Vancouver that the finance sector faces "existential" challenges because of the continual erosion of public trust stemming from the steady stream of illegal and unethical behaviour being uncovered all over the globe.
"Since the collapse of Lehman Bros., we've had this steady drumbeat of bad actors on a global basis in the financial system. Individuals that have brought entire firms down; firms that were excessively leveraged and not knowing what they were doing; collusion among finance professionals, recently with LIBOR and on Wall Street in terms of insider trading," said Rogers. "It's left a really bad odour in terms of the way the public perceives finance and finance people. We're not trusted."
Instituting new regulations has been the primary means of addressing the issues. But Rogers said over-regulation and excessive administrative burdens from new rules could stifle growth and innovation in a key player in the global economy. He said better enforcement of existing rules would contribute more to improving the markets. From an investor's perspective, the deficit of public trust could also lead to significant changes in investor sentiment about the markets and further decline in retirement savings rates that can "harm prospects for a dignified retirement.
Rogers argues that finance professionals and firms play an integral role in rebuilding investor trust, not only in abiding by professional ethical codes, but also by instituting company-wide codes of conduct, which he equated to being an investor's bill of rights.
"Investors should be able to ask what is the firm's code of ethics. It should be part of the buy decision of anyone choosing someone to manage money."
Business in Vancouver spoke with Rogers after his presentation to expand on what he thinks finance professionals and the industry must do to rebuild public confidence in the industry.
Q: How realistic is it to expect that emphasizing ethical behaviour by finance professionals will boost public confidence in the industry?
A: If there were a magic-bullet solution, people would have used it years ago. But it's the collective actions of thousands of individuals, day in and day out, that lead either to the erosion or restoration of trust. In any profession, there will be bad actors. But when we had the kind of trauma that occurred in the past several years, we feel that, collectively, we have to step up and try to lead out of this situation.
Q: How does a code of conduct at a company boost investor confidence or investor protection?
A: At the firm level, if a firm follows a good code of ethical conduct, the customer is entitled to expect the firm will abide by it, and the customer can seek redress if it doesn't.
Q: What are the tough questions that investors should be asking of their potential or existing advisers to get a sense of their trustworthiness?
A: The kinds of questions investors – professional and non-professional – should ask would include show me your code of conduct and code of ethics; show me the educational credentials of people in the firm; show me evidence you will act in my best interest and not in your own interest.
When you get down into products, you want to understand how compensation occurs, how do people get paid. You also want to understand the risks of the advice you're getting.
Too many people rely solely on potential returns or historical returns without adjusting for risk and volatility, so that's another key area to discuss.
Another thing investors need to do is go to the regulators' websites and see if any of the firms they are dealing with have ever been sanctioned or fined. They need to do this due diligence.
Q: Many investors expect that their advisers provide investment or financial advice that's in their best interest. Legally that isn't necessarily the case. Do you think that should change?
A: If a client feels as though their adviser should be acting in their best interest, in other words, there is a relationship of trust and the expectation that someone will act in their best interest, then that agent owes that person a fiduciary duty. It's a pretty broad test. They should also disclose any conflicts of interest.
Q: Should governments be giving more resources to fund better enforcement?
A: Absolutely. I can't think of any market where there are sufficient enforcement resources in financial markets. There are a lot of metrics that show which regulators are overwhelmed. But you also want to look at the qualifications of the staff. If you only have lawyers with no financial market experience, there's going to be a problem; and if you just have people coming from industry and not enough hard-nosed prosecutors, you've got a different problem.
Q: How does Canada compare?
A: It's an interesting market with no single regulator, but a combination of self-regulating organizations, exchanges, provincial regulators and a national-level presence. It has survived the global financial crisis in great shape, so based on the evidence, you'd have to say it's performed quite well.
Q: Are there regulatory areas that need improvement?
A: It's hard to generalize globally, but crisper and more encompassing definition of fiduciaries, more rigour around credentialling and attention to enforcement.
Q: Do you think more needs to be done for the average retail investor to provide the tools or documentation to help him or her save or invest?
A: There are a lot of tools out there to screen advisers and products and there are some simple strategies that can keep investors relatively safe. But too often, people don't take enough responsibility for their own finances and their own savings. It's like saying you need to go to the doctor every year; you need to do it and you need to do an annual financial checkup with an ethical, qualified adviser. •