Institutional investors remain almost twice as fearful of a market crisis hitting over the next three years compared to retail counterparts, according to a new CFA Institute study.
The latest biennial CFA Institute ‘Investor Trust Survey’ found almost 70 per cent of institutional investors expected a market crisis to occur over the next three years, up from 54 per cent in the 2020 poll.
But retail investors are even more bullish than two years ago with only 40 per cent putting strong odds on a market crash in the short- to medium-term in the 2022 study, falling from 49 per cent in the previous report.
“Fortunately, 84% of institutional investors believe their investment firms are well prepared to handle a crisis, but only 43% of retail investors agree,” the CFA paper says.
Despite finding significant differences across a range of other factors among institutional and retail cohorts, the latest survey reveals overall trust in the financial services industry has improved in both investor subsets since 2020.
“Institutional investors—such as insurance companies, pension funds, endowments, and others—generally have high trust levels in the firms that manage their assets and are satisfied with the value these firms provide,” the study says. “Retail investors also express high trust levels overall, though trust is lower for them than among institutional investors, and importantly, satisfaction differs between retail investors with an adviser and those without an adviser.”
The financial services trust gauge for institutional investors jumped 21 per cent over the last two years to reach 86 per cent; retail investor trust in the sector, meanwhile, rose 14 per cent over the same period to 60 per cent.
“… the most trusted segment of the financial services industry among retail investors is consumer banks (57% trust or completely trust this segment),” the CFA report says. “At the opposite end of the trust spectrum are robo-advisers; less than one-third trust or completely trust robo-advisers, although this proportion has increased from just over a quarter in 2020.
“Trust in financial advisers is at 56%, and trust in investment management firms is at 53%.”
Consistent with previous surveys, the 2022 study found retail investors who used advisers expressed more trust (69 per cent) in the financial services industry than DIY individuals (47 per cent): both statistics marked a significant improvement on the 2020 results.
“Those with an adviser are more likely to be very confident in their ability to make good investment decisions (36% of those with an adviser compared to 23% of those without an adviser),” the CFA paper says.
Nonetheless, the study reveals remaining gaps between retail investor expectations of financial advisers and what they actually receive.
“The two largest remaining gaps now—both at 29 pps [percentage points] —relate to expectations around disclosures of conflicts of interest and fee disclosure,” the paper says. “Fee disclosure remains of highest importance, but the gap between the importance of full fee disclosure and how well financial advisers are doing in disclosing fees has narrowed from 34 pps in 2020.”
Institutional investors, however, are largely happy with the services they receive from third parties, including fund managers.
“Furthermore, the influence that institutional investors have had on industry practices through their bargaining power may be part of the reason that the gaps among retail investors are narrowing,” the paper says.
“For example, a significant majority (84%) of institutional investors have renegotiated the fees they pay managers within the last year, compared to 65% in 2020. In 2020, 73% of both retail and institutional investors said the fees they pay are fair. The data in this report demonstrate that those numbers have risen to 93% among institutional investors and 79% among retail investors.”
The CFA study cites five reasons for the financial services trust hike over the last two years, including: strong market performance; fee compression; technology-enabled transparency; easier access to markets; and, new personalised products.
But financial services firms should look to technology, better alignment of interests and stronger connections with clients to sustain or improve trust levels.
“The increase in investor trust in this year’s study offers optimism about the effectiveness of the investment industry,” the CFA report says. “We note, however, that this comes at a time when performance has been strong, with few enduring tests of trust. There is also a segment of retail investors who remain distrustful of the industry and are unlikely to fully participate in it.”
Coalition Greenwhich surveyed 3,588 retail and 976 institutional investors across 15 countries late last year on behalf of the CFA Institute.