Trust tops the list for investors

Twice as many prefer trust over performance when hiring financial advisers

Investors surveyed say that their trust in advisers is driven by priorities of full disclosure of fees with 84 per cent giving it high importance. |

Trust from investors emanates from the disclosure of fees, a survey has revealed. The credibility in the fund management industry especially for the hedge funds took a hit after the global financial crisis as investors fretted about ever-escalating fees after successive years of underperformance.

The CFA Institute survey which used 3,000 retail investors as its respondents revealed that financial advisers fall short of meeting expectations the most in the areas of transparency and performance. Investors surveyed say that their trust in advisers is driven by priorities of full disclosure of fees with 84 per cent giving it high importance. Disclosure and management of conflicts of interest was at 80 per cent, and generating returns better than a benchmark at 78 per cent, yet respectively, only half of the participants say that advisers deliver satisfactorily on these.

“Higher trust comes with higher expectations, and we are not there yet until we can consistently prove our value to clients by providing solutions, not simply products. We need universal disclosure of fees and performance to drive home this message,” Paul Smith, president and the CEO of CFA Institute said. Trust is the basic tenet on which the fund management industry works on because it is the question of people’s hard earned money, which they want to keep safe amid varied propensity of risk.

Retail investors’ trust in an adviser is a significant factor in their decision to hire an adviser, but performance must live up to their expectations if they are to remain in the relationship. While twice as many retail investors place an emphasis on trust over performance in their decisions to hire financial advisers, the survey found that underperformance (57 per cent) and lack of communication or responsiveness (51 per cent) are the reasons they leave a relationship.

Among institutional investors, the two most important

57% Investors who leave advisers due to underperformance

attributes when hiring an asset manager are trust to act in the client’s best interest and ability to achieve high returns. This group ranks ability to achieve high returns (24 per cent say it is their priority) much higher than retail investors do (17 per cent) when choosing to hire an asset manager, the survey revealed.

Tech vs humans

Amid rising popularity of fintech in the fund management industry, investors say they are better off with human advice than technology. While 72 per cent of investors say they are more likely to trust advice from a human adviser over a roboadviser, 48 per cent say that in three years it will be more important for them to have technological tools to execute their own strategy rather than a person, the survey showed.

While 40 per cent of investors say that the increased use of technology has also increased their trust in their financial advisers, investors are worried about any threats of security breaches. For institutional investors, it is the most important factor in building trust with an investment firm: 82 per cent say that having reliable security measures to protect their data is even more important than performance and disclosures.

“These findings provide a road map for how our industry can increase its credibility and address investor concerns,” said Rebecca Fender, CFA, head of the Future of Finance initiative at CFA Institute.

Methodology

“Trust hinges on professionalism. Advisers need to demonstrate a strong commitment to ethics, expertise, and transparency to win their clients, and create real value for the fees they charge.

“If one third of investors don’t think their adviser puts their interests first, this is a challenge to our industry to do all we can to earn that trust,” Fender added.

The CFA Institute said, in collaboration with Greenwich Associates, it gathered responses from 3,127 retail investors and 829 institutional investors from Australia, Brazil, Canada, China, France, Germany, Hong Kong, India, Singapore, UAE, United Kingdom and United States.

The survey was fielded in November and December 2017. Retail investors surveyed were 25 years or older with investible assets of at least $100,000 (Dh367,000). Institutional investors surveyed were those responsible for investment decisions at entities with at least $50 million in assets under management, from public and private pension funds, endowments and foundations, insurance companies and sovereign wealth funds.