Paul Smith, CFA: “Let’s Make the World a Better Place for Investors”


Welcoming delegates to the 68th CFA Institute Annual Conference in Frankfurt, Germany, Paul Smith, CFA, kicked off his tenure as president and CEO of CFA Institute by discussing trends affecting the future of finance. He also provided delegates with three action items that they could take back to their local communities.

Below is a transcript of Smith’s address.

It’s a pleasure to be with all of you here in Frankfurt and welcome to those of you listening via Livestream. I’d like to thank CFA Society Germany for their partnership and great support of the 68th Institute Annual Conference. It’s a great opportunity for me to meet you all here in person. Please don’t be shy, come up and say hello. I really do want to meet you. I also enjoy travel a great deal so I hope to see you all in your home societies, if not over the next three days. So please do come up and say hi.

I’d like to frame my remarks this morning by saying that I would like to help move our conversation as an Institute forward to discuss how we can better deliver our mission — to lead, to build the investment profession for the ultimate benefit of society. I want to look forward and not back. I want to urge us all to work in a more purposeful fashion, to build our profession in a way in which we can all be proud.

We’ve spent a large portion of the last five years talking about trust and how that is an essential ingredient for our profession to succeed. This has been a hugely important and worthwhile effort, and we must keep on talking about trust and the need for ethics in our profession but that has largely been a conversation that has been about history. We must now add to this conversation. We must talk about two other issues of great importance: (1) technical competence, how good are we at what we do? (2) the necessity of proving better to society at large our technical competence and our trustworthiness because only then will we get the buy-in from society that we seek and truly establish and build our profession into the future.

Indeed, our profession has been through a lot over the past few years. We all know that the global financial crisis has left a terrible wound that has not yet healed. Society does not seem to attach a high value to our profession and at times I’m afraid I can see why. After seven years we’re seeing only small rays of sunlight peeking through the clouds. At the same time, the world around us is changing fast and the investment management business will have to change to keep up with the times. I’d like to paint a picture this morning of the changes yet to come as we look at the future of investment management at this conference and give you three actions that you can all take back with you to your communities. It’s a good news/bad news picture.

First, the good news. Between 2010 and 2020, over the next six or seven years, it’s predicted that an additional one billion middle-class consumers will emerge globally representing the largest single decade increase in clients in history. These increases will be primarily due to growth in South America, Asia, Africa, and the Middle East. The global middle class is also projected to grow by 180% by 2040 with Asia replacing Europe as home to the highest population of middle-class people. Our client base is set to explode. Add to this prediction that global investable assets for the asset management industry are expected to increase to more than US $100 trillion by 2020 with an estimated compound growth rate of over 6% per annum — so, much higher than global GDP growth.

Citizens and businesses around the world need our expertise now and will need us more than ever in the years to come. Despite ourselves, the industry is growing. This may not be apparent if you work in small businesses in the developed world. But it is very obvious in the developing world, in big and small businesses, in mutual funds, and in private wealth firms. There is a problem, however, and it lies in the fact that many of our potential clients just don’t see our value. We have to convince them that investment professionals work to meet both clients’ investment objectives and create social impact. Our contribution to society is essential because we connect those who need capital with those who are willing to loan it. Many peoples’ hopes and dreams depend on this capital, as we know — new businesses, mortgage savers, people who are saving for retirement and for their children’s education.

Does society value this work enough? I don’t think so. Have we done enough to demonstrate our value? Honestly, I’m not sure that we have. We have to deliver the clear message to investors and policymakers that we are a force for good, one that places the interests of investors above all else.

We’re at a crossroads in the profession. Our ability to add value is being pressured on many fronts. With the banking sector more under control, regulators are now turning their attention to investment managers. They are scrutinizing our culture, our interactions with customers, and our effectiveness in implementing required regulatory changes. This regulatory focus will continue to increase through 2020. That probably rings especially true here in Europe which is in grip of a lot of those regulatory changes. In many ways, this is the bad news.

In addition, excessive focus on quarter-over-quarter shareholder value has also taken us off track. This keeps the pressure on us without proper regard to the long-term interests of our clients and the communities which we serve. Over-reliance on fund rankings quarter-over-quarter reinforces this focus on short-term performance metrics and deflects attention away from our primary goal of helping investors to achieve their long-run investment objectives. I call it the short-termism curse of the industry, and we need to break this pattern.

The reality is that whatever is measured is what gets managed. If we take the longer term view then things may begin to change. Many great thinkers are turning their attention to this challenge at present, and several of the sessions here at this conference will delve in greater depth into that topic. It’s a work in progress and we need to play a role in this debate because we’re not really achieving what investors want from us. If we don’t act to reform ourselves, I very much fear that regulation will become more intrusive in our daily lives. Under my leadership, I intend for us to focus on some of these issues.

The digital revolution is also advancing. The birth of robo-advisers, the rise of ETFs, and the success of digital disrupters like Alibaba and Tencent in China, underscore the powerful appeal of disintermediation. Nearly two-thirds of high-net-worth individuals expect to manage most or all of their wealth digitally in the next five years and would consider leaving their current investment firm if an integrated channel experience is not provided.

Though we have a solid foundation from which to address the future and partner with industry leaders for change, we have considerable work to do to advance the investment profession. In fact, I would question our very status as a profession. The benefits provided by a doctor or a lawyer are clear, crystal clear to the users of those services, but this isn’t always the case for investment professionals. In essence, we need to do a better job of explaining ourselves to our clients and justifying the fees that we charge. There is too much self-medication in the investment world.

How will we do this? I’d like to lay three actions before you today and charge you all with the personal responsibility of trying to push these three things forward within your own firms and within your own communities.

Firstly, we have to better demonstrate what it means to be a profession by promoting the highest standards of education, competence, and professional conduct. When we visit the doctor we assume he/she is qualified and competent to diagnose whatever it is that ails us. Investment managers don’t yet have this level of respect and trust from society. Many of our colleagues have few, if any, qualifications, thus why should society trust our competence to serve their investing needs? To change this we have to take actions that have an impact on colleagues and on clients.

Make sure your colleagues know about and pursue the best finance education available. Those of us here today know that that is the CFA charter. Don’t stop with decision makers. Just as doctors depend on nurses, make sure that those colleagues who support your work meet a high standard of education. The Claritas Investment Certificate is designed to fill that gap. It’s taken a lot of criticism since we launched the certificate two–three years ago, but think of it in those terms. How can you do your jobs properly if the other 80%–90% of people in your companies don’t share the same vocabulary, the same training that you have, at least in part? We all have a personal responsibility to spread the word about the need for well-trained people throughout the investment management value chain.

Secondly, let’s amplify our impact by engaging with investment management industry leaders in our communities and worldwide to better partner with them, to develop professionalism at every level of their firms. Currently, CFA charterholders are employed at more than 31,000 firms worldwide — 31,000 — that’s a huge number. We have more influence than we think we do within our profession.

These firms should have an overwhelming vested interest in adopting the highest standards of professionalism at every level within their organization. A sustainable, successful business is built on serving client needs. We’re in a unique position to help them meet this requirement, yet only 1,100 firms worldwide have adopted the Asset Manager Code of Conduct that we promote. I ask myself: What are the other 30,000 firms that CFA charterholders are employed by doing in this regard? What are we all doing as individuals within those firms to promote our Codes and Standards and our education to our colleagues? Your reputation as an investment professional is tied to the reputation of the firm that employs you. We need to affect change from the inside out and this means building deeper relationships with senior levels of firm leadership globally.

Our profession also has a diversity problem. If we are to change we must also change our demographic. For too long our profession has been dominated by middle-aged, middle-class men and I stand before you as one here today. Among the actions we should take, we need to hire and promote more women within our businesses. John Coates talked about this last night for those of you who were here at the opening plenary session. Studies show that mixed-gender teams bring much needed diversity of thinking to the investment process and improve investment outcomes.

Further, women are poised to play a significant role in the global economy in the coming decade with close to one billion women who could enter the global work force. Several CFA societies are already hosting events targeted to women and we encourage you to get more involved in these things. For the first time, CFA Institute is hosting the Women in Investment Management Conference in San Antonio, Texas, between 2–3 June of this year. This is a conference with a difference. The sessions will debate how mixed-gender businesses generate better investment returns for clients. Please do try to attend if you can. A number of societies are very generously acting as conference sponsors as well. Let’s show our support as a family for positive change.

Third, we have to make change happen by advocating for policy research and thought leadership that benefits investors and society at large. This will foster the health and future success of the investment management profession. Investors have the right to be served by professionals who act as fiduciaries of their savings — a hot topic I know in the United States at present. They also deserve an underlying investment environment that is fair and transparent. As a professional body, it is our duty to exercise discipline within the profession and ensure that the profession nurtures an environment where investor interests are placed above all others.

One way CFA Institute is getting this message out is by partnering with our member societies to launch the second Putting Investors First Month campaign. Last year, this annual awareness campaign inspired activities in 58 cities globally by member societies representing more than 60,000 investment professionals. It takes place in May of every year. This initiative aims to unite investment professionals in a commitment to place investor interests above all others. This year’s awareness campaign will encourage the global investment community to endorse and share the Statement of Investor Rights that we have created. This is a list of 10 rights that any investor anywhere in the world should expect from financial services providers. Throughout the month of May, many of the organization’s 144 member societies will call attention to the needs and rights of investors. On the screen you will see the website. Please do go on the site and personally endorse the Statement of Investor Rights that you will find there.

We must continue to stand together for what is right. Spread the word within your communities by supporting Putting Investors First Month. We want to inspire our communities to make real impact and foster a market environment where investors can truly thrive.

We also have an opportunity to play an influential role in developing the investment management industry in emerging markets globally as well, where rules and practices are still being shaped. This is very much the case in India and China where we recently opened offices in Mumbai and in Beijing. Personally, I’ve seen firsthand the impact that we can have and the positive influence we can be in the developing world. I think we underestimate that hugely. As I get into my new role, I’m quite sure I will discover the same conditions in Latin America, Africa, the Middle East, and emerging Europe. It’s by far and away the most exciting part of my job, seeing the deep level of engagement that we can have with regulators in the developing world and the impact we can have on best practices within those communities.

To wrap up, as one CEO puts it “We’re in the twilight zone of a great transition. Letting go of the familiar and embracing an alternative narrative will call for courageous conversations and deep collaboration across disciplines.” If our actions are to make a difference we need to get out of our comfort zones. During my tenure, my mission is to have more measurable impact with the profession, regulators, investment firms, investors, and society at large. I’m trying to take my own advice today and will participate this afternoon in my first Twitter chat. I barely know what a tweet is. I am what I am, a bit of a technological dinosaur, but I’m willing to learn if it will help us get this message out to our communities.

As you attend the conference sessions over the next three days and network with your colleagues, please, please try to step out of your comfort zones. If you aren’t already active within your society please become so. Get involved.

Let’s make the world a better place for investors and in turn generate great benefit for society at large. Thank you very much for listening.

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