Financial Firm, Investment Bank and Asset Manager are Starving For Ethics to Regain Trust

The CFA Institute has released its 2014 Global Market Sentiment Survey. They find that while financial services professionals are much more optimistic about global economic prospects for the coming year. However, they still question financial services industry integrity. In addition, the report points to the danger that market recovery will divert attention away from reforms needed to keep global investment markets robust. To control systemic risk the Institute’s members call for global oversight combined with more local enforcement. On the brighter side globally the survey also found that fewer investors now see mis-selling by financial advisors as the main problem facing the financial services industry.

Untrustworthy Major Players
Edelman Investor Trust Study (http://www.cfainstitute.org/learning/future/about/Pages/investor_trust_study.aspx) found that just 52% of over 2,100 retail and institutional investors surveyed trust the financial services industry to do the right thing. That made financial services the least trusted major industry in 2013. At 53% trusted, banks scored only slightly higher. Meanwhile, only 24% of those surveyed ranked a reason unrelated to trust as most important to choosing an asset manager. Just 17% cited performance as most important. Another 7% gave fees as their main criterion.More Bad News

While investment managers raise the alarm that increasing regulation on the already over-regulated financial services industry will damage competitive markets, just 13% of those surveyed thought that they could rely on financial services firms to enhance trust. Slightly more, about 28%, believed that they could rely on financial services professionals. A whopping 53% thought that only government regulation had significant potential to increase trust in the financial services industry, citing initiatives like Dodd-Frank, Basel III, and Solvency II as helpful, at least at first and on paper.

Unfortunately, while investors considered governments competent and skillful at one time, to a large extent they botched the job. How regulation will solve the problem remains unclear. In addition, in the wake of incompetent management of its own confidence in government’s ability has plunged to just 14% of those surveyed. Like it or not that leaves the financial services professional holding the bag for rebuilding trust in the industry.

Macro Initiatives That May Help

Although investors say that they don’t trust the financial services industry or government nearly three out of every four say that they trust the capital markets. Members of the CFA Institute support several initiatives to keep the global markets secure, including oversight, regulation, and monitoring of systemic risks as well as greater transparency. Also on the docket fast, consistent handling of impaired assets and greater use of standardized derivatives combined with central clearing would act to immunize the capital markets against destabilizing shocks.

Need for Both Global Oversight and Better Local Enforcement

Voluntary reform always attracts an agreement in much the same way that every politician likes apple pie and patriotism. On the other hand a significant plurality (30%) of investment professionals want increased enforcement of local law in their home markets. Another 24% want better enforcement of rules governing financial disclosures, corporate governance, and corruption. Taken together, mis-selling of investments by advisors, market fraud, issues of reporting and disclosure, harmful trading practices, and the use of derivatives accounted for 90% of votes for the worst problems facing the industry. Globally, a scant 10% cited the structure of the financial services industry as the biggest problem.

A Glimmer of Hope

On the bright side just 12% of those surveyed now point to mis-selling of investments as the biggest problem for the industry globally. That should feel like a ray of sunshine for those professionals who didn’t turn on the oven, but have taken most of the heat.

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