Institutional investors have been losing trust in the financial services industry over the last two years, according to a new CFA Institute report, while their retail counterparts remain largely unmoved.
Despite the almost 7 per cent decline in the institutional investor trust metric compared to the 2018 study, the sector still has a rosier view of the financial services industry compared to the retail market, the CFA study found.
But having a financial adviser made a large difference to the attitude of retail investors, the CFA 2020 ‘Earning investors’ trust’ global report says.
“There is a significant trust gap between investor segments: 65% of institutional investors trust the financial services industry, versus 57% of retail investors with an adviser and just 33% of retail investors without an adviser,” the survey says.
Nonetheless, the trustworthy status of financial advisers slipped a little since the previous CFA study.
“Only 59% of retail investors with an adviser say that their adviser is their most trusted source of advice, somewhat lower than in 2018, when it was 65%,” the report says. “This trust gap can be viewed over time in relation to the effectiveness of the investment advisory industry.”
The survey, which canvassed over 3,500 retail and 921 institutional investors in 15 jurisdictions late last year, highlights the Australian Royal Commission into financial services as a low-point for trust in the industry.
“While investment managers and asset owners were largely not targeted, the financial services industry as a whole and particularly the big banks, insurance sales, and financial advice providers did not fare well,” the CFA report says.
“The damage to reputation and to trust that was incurred from the publicity generated by the Commission has continued to play out. Consistent with this is evidence in this study of a weakening position of trust being present in the Australian financial services industry.”
Australia, in fact, recorded the lowest measure of retail investor trust in financial services across all countries in the study of just 24 per cent, representing a fall of 7 per cent from the 2018 survey.
While NZ was not included in the CFA research, the local financial services industry has suffered a similar, if less damning, regulatory report card over the time period. Also cases such as the now-convicted ponzi scheme operator, Dunedin financial adviser Barry Kloogh, have likely had some broader impact on perceived industry trustworthiness.
Kloogh was sentenced to almost nine years in jail last week – and a more than five-year non-parole period – after being found guilty of charges relating to his long-running (20 years plus) ponzi scheme.
“The proportion of retail investors that say that their adviser is their most trusted source of advice needs to be higher to diminish the trust gap in the investment advisory industry,” the CFA study says. “The trust gap between asset managers and asset owners is narrower but also needs to be addressed.”
Institutional investors tend to be more trusting in the financial services industry (and most other sectors) than retail investors but also more vigilant in how they assess and monitor that trust.
For instance, the survey found, compared to retail, institutional investors are much less likely to simply trust asset managers to act in their clients’ best interests.
Large asset owners put more weight on returns, best practice compliance and fees than retail investors when assessing fund managers, the report says.
According to the study, some “65% of institutional investors have renegotiated some manager fees within the last year”.
“While retail investors do not necessarily have the same level of negotiating power, a similar number said they had discussed fees with their adviser within the last year, so it is a factor they are monitoring,” the CFA report says.
“Although the majority of investors (73% of institutional investors and retail investors with an adviser) believe the fees they pay are fair, high fees are one of the top reasons retail and institutional investors give for considering leaving an investment firm or adviser…”
The CFA study identifies three underlying themes of “information, innovation and influence” that can help create trust in the financial services industry.
Among a broad-ranging set of findings – outlined by CFA head of advocacy Asia-Pacific, Mary Leung in a recent webinar – the report also touches on the importance of technology (including robo-advice and artificial intelligence), ESG processes and the systemic global pension risk.
The 2020 report is the fourth in the CFA biennial series, dating back to 2013/14.
“We have seen how trust in the industry has evolved over time but also how the essential characteristics of trust endure,” the paper says. “Trust must be built over time, yet it can be easily broken.”