Knowledge is a safeguard

ABUSED: INSTITUTIONS HAVE ALL THE POWER

There’s an asymmetry of information between investors and investment professionals.

Giving people the tools to react appropriately is giving them a ‘voice to values’ – CFA Institute boss.

The challenge in the finance industry is that there’s an asymmetry of information between the end investor and the investment professional, chief executive and CFA Institute president Paul Smith told Moneyweb.

Financial institutions are enormously powerful compared with the individual investor – and that power is often abused.

Smith says events like Steinhoff highlight that the underpinnings of global markets are faulty and their foundations are weak.

The industry doesn’t have enough ethically educated professionals and probably not the right accounting or regulatory regimes in place. He argues that the investment industry doesn’t talk enough about its sense of purpose.

People trust their insurance company, bank or doctor because they understand their purpose. They expect their insurer to pay their claim if something happens to them.

“With investment management, it is a lot harder to establish that sense of purpose and so we need to work harder on doing that because trust is founded on purpose.”

While credentials and professionalism are also important, it is hard for investors to trust an investment manager if they don’t know what they’re doing or if they can’t see the value they add.

Smith says events like the Steinhoff share price meltdown undermine that trust, as investors don’t understand why professional investors didn’t pick up on the accounting irregularities or blow the whistle.

CFA Society South Africa president Nerina Visser says the quality of data available when making investment decisions or doing analytical assessments is very important.

Introducing things like eXtensible Business Reporting Language (XBRL) will assist in terms of the consistency with which financial information is reported.

From a CFA perspective, standards around reporting and transparency are also important because they bring certain minimum requirements that might not have been there in the past, she says. But where investors are misled with false information, it becomes a lot harder to detect fraud.

In these cases, investment professionals must look beyond the numbers fraudulently presented to them for other signs that things aren’t what they seem.

Smith says no matter how highly qualified professional bodies are or how good the regulation is, if someone’s intent on defrauding investors, they will find a way.

Smith says if people don’t know that, they should not be taking things that do not belong to them because they learnt this from their parents, it is not something they will learn when entering the industry.

However, people can be taught how to react to ethical challenges.

Smith says by giving people the tools to react appropriately to ethical dilemmas, they’re given a “voice to values”.

“When you look at frauds in general, it is not that someone set out to defraud from the get-go. It was where they ended up because one thing led to another …

“That is what voice to values is all about – how do you give voice to your ethical values and recognise the tools you’ve got at your disposal to be able to call out some of these challenges.”

XBRL would give consistency to financial reporting.