Transformation of the investment management industry starts with its professionals

In his opening remarks, Paul Smith, CEO, CFA Institute made candid comments about hot topics in the industry – Trust, Code of Conduct, Partnerships, Value to investor etc. He noted “The benefits provided by a Doctor or a Lawyer are crystal clear to the users of their services but this is not the case for investment professionals”. He highlighted the following challenges:

  • Technical competence of investment professionals ultimately affecting trustworthiness in the society. Many professionals in the industry have little to no qualifications.
  • ‘The curse of the short-termism’ that derails professional from delivering clients’ long-term goals.
  • Lack of value delivered to the investors and the society.
  • Digital technologies moving at a much faster pace than the industry’s is able to absorb them. It is not a complete stretch of the imagination that technology could lead to disintermediation unless investors receive highly personalised and sophisticated integrated-channels experience.

So, what needs to be done?

  1. Professionals and organisations need to conduct themselves in a manner that fosters Trustworthiness. Therefore, promote higher professional standards, qualifications and good conduct across the entire organisation and not just the decision makers. Employees in an organisation should use the same vocabulary and understand their fiduciary duties.
  2. Partner with leaders in the industry and sign up to the asset manager code of conduct as well as support investor rights. On the surface, the code of conduct and investor rights appear to be simple and common sense. So why aren’t the professionals signing up for these?
  3. Close the gender gap and bring diversified thinking at all levels in the organisation.
  4. Advocate for policy research, thought leadership to benefit investors and society at large.

It was refreshing to see Paul challenging the status-quo and urging the professionals to take immediate action. Here are some useful links: Asset Managers Code of Conduct – 10 Simple Investor Rights – Watch the replay of Paul’s session here – My short Finextra video interview on ‘Innovation in Wealth Management’ discussing similar topics –

3 Things I Learnt at the CFA Annual Conference (Day 1)

>1. Mr. Regulator, please provide guidance

Joachim Klement delivered a talk titled ‘Identifying Investor Risk Profiles’ and using published facts and a series of examples, he demonstrated that the widely adopted practice of using risk questionnaires to establish risk profile of an investor is highly unreliable. And yet, the foundation of every investment decision made for, or on behalf of an investor is the established risk profile. Whilst the majority of his discussion focused on retail investors, he made an excellent point that in case of institutional investors that use intermediaries, the issue is further magnified by the fact that intermediaries have imperfect knowledge of the end-client risk profile. The lack of complete understanding of client risk profile and goals is a possible reason for mis-selling.

He asked that the regulators could and should provide guidance on how wealth managers should assess the investor risk profile. I see this differently to Mr. Klement. I believe that the collective wisdom of practicing wealth managers ought to lead the way after all wealth managers are paid to act on behalf of their clients.

>2. Onions once ruled the Indian Government

“What is the most important food item in India?” – asked Dr. Pippa Malmgren during her session on Geopolitics. Surely, wheat or rice? Apparently it’s Onions! But this was not a trick question – turns out that the supply and price of onions in India had a big impact on the popularity of the Government. In 2010, the government was forced to introduce export control policies to address the sky-rocketing onion prices.

Dr. Malmgren took several examples of current issues around the world concerning political and economic powers to explain the complex web of interdependencies in a global political landscape. The challenge for the wealth and asset managers therefore, is not “What” but “How” to think about Geopolitics and to recognise the correlation/ its effect on asset prices.

In a nutshell, if you are a politician, you can never please everybody!

>3. Faecal transplant can change your personality

A fantastic keynote session titled “The Biology of Risk Taking” by John Coates in which he began by discussing the role of Brain in our bodies. Apparently, there is no such thing as a pure thought – our brains exist to plan and execute movements from flexing muscles to issuing instructions to pump blood to certain parts of the body when it’s needed the most.

He then went on to discuss various chemicals our bodies produce such as dopamine, cortisol, adrenaline and their direct correlation between how our bodies react to situations. Focusing on cortisol, his controlled experiments on a trading floor showed correlation between levels of cortisol and appetite to take risk. Data collected over two week proved that during a market crash, cortisol levels shot up and the same time traders and investors avoided risk. Whilst the brain chemistry was changing, the traders did not feel stressed or observed any changes in their physiological state.

The interesting thing is that acute stress can be good especially if there is are small stress episodes with recovery periods (just like exercising) can build resilience towards chronic stress.

John highlighted that the Wealth and Asset Management industry is based on theories whereas some other fields such as medicine has no theories. ‘Medics’ consider and evaluate every possible option. An experiment conducted on two mice to observe the effects of faecal transplant. One of the mice was afraid of water and another that was quite fond of it. After the transplant, whilst there was >90% success rate in addressing the CDI disease, the new chemicals in their bodies were also altering their personalities. This transplant had swapped their personalities – the swimmer mice had become afraid of the water and the mice that was afraid of the water became quite a swimmer! So before you opt for one of these, get to know your donor!!!

The point John made was to look beyond your industry to find ways to innovate.