How does an investment professional avoid losing her client’s trust and build a lasting professional relationship? Most professional organisations ask their members to abide by a code of conduct.
There are two sides to a true professional – a) professional competence, and b) ethical behaviour. This is true for all professions – doctor, lawyer, accountant, investment advisor, etc. Good professional associations recognise this and help their members improve on both counts.
As individuals, we make use of the services of these professionals to achieve our goals. In the same way that we expect our doctor to diagnose what is wrong with our condition and help us recover our health, we expect our investment advisor to give us the right advise and improve our financial well-being. In both cases, the professional knows much more about the subject than we ever can, so we are putting our trust in them. But how do we know that our trust is justified? And what can we do, as professionals, to earn and keep this trust?
One of the lessons management students learn is “what we value we measure, and what we measure we improve.” Is it possible at all to measure trust? And even if we learn to measure trust, how do we learn to improve it?
CFA Institute is a global not-for-profit membership association of investment professionals. We conduct systematic trust surveys to determine the level of trust that investors have in the financial system. According to the surveys, investor trust hit a low in the wake of the global financial crisis of 2008. Over the last 10 years since the crisis, trust levels have recovered, but remain low, especially when compared to other industries.
Twice as many retail respondents rate trustworthiness as a more important attribute than performance while selecting a financial advisor. As an investment advisor trying to grow your client base, the message should be clear to you – find ways to improve trust. The Securities and Exchange Board of India (SEBI) has reinforced this message by insisting that mutual funds include the message “past performance is not indicative of future performance” in their advertising.
As Warren Buffet puts it, “it takes a lifetime to earn trust but only five minutes to lose it.” It doesn’t help that investment advisors are constantly faced with the temptation to compromise the long-term interests of their clients for short-term gains.
So how does an investment professional avoid losing her client’s trust and build a lasting professional relationship? Most professional organisations ask their members to abide by a code of conduct. CFA Institute members and CFA® charterholders sign a professional conduct statement every year affirming the CFA Institute Code of Ethics (the Code) and Standards of Professional Conduct (the Standards). The Code consists of six statements that members are expected to internalise and practice. The very first line of the Code asks members to “act with integrity, competence, diligence, respect and in an ethical manner towards public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.” Other statements deal with other aspects of professionalism, including, among others, the need to place the interests of clients above your own needs, and the need to continuously improve one’s professional competence.
As professionals, we face difficult ethical dilemmas as we deal with the pressure of earning our living and building our practice. We need to recognise the implications of our choices and should have the discipline to take the right decisions. CFA Institute has developed a framework for ethical decision-making that involves four steps – step one is to IDENTIFY the fundamental investment profession principles involved such as fair dealing, full disclosure, conflict of interest, diligence etc. The second step is CONSIDER the different dimensions of the issue – what are the situational influences, what alternatives are available to deal with the situation, and do you need additional guidance. Next, ACT – i.e. decide or elevate the issue to a higher authority. Finally, REFLECT on what has just happened and identify your strengths and weaknesses.
Whether you are a one-person investment advisory firm or the CEO of a large wealth management firm, the above principles are equally applicable. As we learn to apply ethical decision-making in our individual practice and at the organisational level, we learn to improve trust and contribute to the long-term improvement in our financial markets. This not only helps the industry but also the economy as a whole as we improve customer outcomes and lower the cost of intermediation. Over the past three decades, India has been making the transition from a socialist state-controlled system to a market intermediated system. This transition has not always been smooth. We have had many episodes where investor trust was violated. It is our collective responsibility to practice, and encourage others to practice, in a professional and ethical manner that will reflect credit on ourselves and our profession.
About the author: Vidhu Shekhar, CFA, is the country head of CFA Institute in India. He is a seasoned financial and investment professional with over 30 years of industry experience in India and abroad and has contributed to the development of Indian financial markets through his participation in the work of various committees, including the Dr. Patil Committee on Corporate Bonds and Securitisation, and the Raghuram Rajan Committee on financial sector reforms.
(This article is sponsored by CFA Institute)