CFA Institute president and CEO Paul Smith, CFA, stood before a crowd of more than 1600 investment professionals from across the globe at the 70th CFA Institute Annual Conference in Philadelphia, and asked a critical question: “What is finance for?” To answer that query, Smith laid out the potentially existential challenges confronting the investment management industry and offered a four-step plan to address them, emphasizing the critical role CFA Institute can play in redefining value and restoring investor trust. “What I hope to do is to frame the challenge our profession faces,” he said, “and propose steps we must take to secure our future and that of generations of charterholders yet to come.”
Below is the transcript of his remarks.
Good morning, Philadelphia! Nice to see you all. Good morning to all of you and to all of you listening virtually today. Welcome to the first full day of the 2017 CFA Institute Annual Conference: Sharpen Your Investment Edge. We are fortunate to have the great support of CFA Society Philadelphia and our sponsors. It’s wonderful to be here. Please, old friends and friends yet to be made, come and introduce yourself. I’d love to meet you.
Being here in such a historic city is a thrill because, as an undergraduate, I studied history and this first love has stuck with me throughout my life. I am well aware that almost 230 years ago, not far from here, the US Constitution was ratified. America’s national government and fundamental laws were established.
And since that time, it has been amended no less than 27 times to meet the changing needs of a nation now profoundly different from the 18th-century world in which its creators lived. And just as the policymakers in DC recognize that times change and they may have to act to modernize the Constitution, those of us in the investment profession may also need to amend our own methods if we expect to keep pace in the 21st century.
This year, we also celebrate our own organization’s history. This is the 70th year of our annual conference and it has also been 70 years since the founding of our institution. Hosting this conference here is significant because CFA Society Philadelphia is one of five organizing societies of our great institution. And from the very beginning, CFA Institute was founded to serve its members through its societies. As I like to remind everybody, we are the child of our local member societies, and not the other way around.
I am also honored to be with you today because, as investment management professionals, you play a vital role for your clients and for society in general.
It is thanks to your expertise and passion that jobs and wealth are created. Businesses grow. Economies flourish. People achieve financial security. All owing to members like you and to societies like Philadelphia.
But I am here this morning to do much more than merely to congratulate you. What I hope to do is to frame the challenge our profession faces, and propose steps we must take to secure our future and that of generations of charterholders yet to come.
Our key challenges are to better define value and to reclaim trust, and by doing so, to raise the professionalism of our industry to a higher level. We need to drive focus within our industry not just on its privileges, not just on the fruits of success, but on our responsibilities.
If business is good for you today, this might sound a bit odd. Indeed, I am not here today to tell you that the sky is falling. But our business is changing, sometimes in ways uncomfortable for us to think deeply about.
The recent rally notwithstanding, you have seen lower rates of return and slower growth since the Great Recession.
You see more investors turning to passive strategies and automated systems. New technologies challenge the way we traditionally provide services — and earn our fees.
These are not abstract issues. These are truly existential.
However, we can still prosper as the landscape changes, and I confidently expect that we will. But we have much work to do. And we are the right people to do that work. CFA Institute is the industry’s foremost setter of global standards. Our job is to look beyond the near horizon and to lead the way into the future on behalf of our clients and of our members.
We are in the best position to advocate for a “new professionalism,” but first I want to define the essential problem. Then I will lay out the four key steps I think we can take together to start fixing it.
So what is it? Whilst we are in an era of low growth and low returns, our clients are concerned that we don’t seem to be suffering accordingly. Margins remain very high. We therefore face increasing public skepticism about how much value the investment industry truly provides, and questions about how trustworthy we truly are. The future of the industry is vital for the functioning of the global economy, for the approximately two million workers it employs globally, and for the millions of clients and end investors that depend on it to manage around $100 trillion USD in assets today.
This begs a bigger question — maybe the biggest question I can think of.
What is finance for?
What do we come into work every day to accomplish? How much good are we really doing — for our clients and for society? How much value do we add to the world?
We all like to say we put our clients first. But it is not enough to proclaim a formal fiduciary commitment to them; we have to live up to that fiduciary standard every day and our clients and investors have to believe that we do.
Sadly, many today have some good and very fair reasons not to believe.
Consider, for instance, the retirement industry. We encourage investors to expect a leisurely, well-funded retirement. The advertisements are top-heavy with sailboats and tropical vacations.
Reality, however, is usually somewhat different. Here in America, the average IRA balance for someone in her or his early 50s is just $92,000 US dollars. For age 40 to 50, it’s only a miserly $50,000 dollars. The low average retirement savings rate, plus low investment returns, means many will work years longer than they originally planned.
We know it. Most investors do not yet believe it. But they will figure it out. By 2050, some 25 million American workers are projected to face poverty in retirement. Do we talk about this? Not nearly enough, in my view.
The retirement industry is a massive money-spinner — for us. In the United States in mid-2016, retirement assets totaled $24.5 trillion USD — more than one-third of household assets invested. Many investment professionals depend on those balances to earn their living.
And the investment management industry has stuck with a retirement paradigm that is well past obsolete. It’s a paradigm that has contributed to the privilege of the personal success that we all enjoy. But privilege comes with a responsibility to stop merely driving fees — and to make the system work — for everyone, not just for ourselves.
We have other responsibilities that go with our privileges. Economic disparity concentrates wealth in fewer and fewer hands. But we need more people, not less, who have the desire and the wherewithal to invest. We must do a better job of reaching out to the middle market, so our future opportunity set continues to expand.
We should find more ways to promote financial literacy, so more people understand not only the benefits of investing wisely, but the devastating cost to families, and ultimately to society, of not doing so. Right here in Philadelphia, the local society hosted a Financial Literacy All-Star Day that provided high school students with a day of financial education. Several other societies globally are also engaged in financial literacy initiatives in their communities, and I am tremendously proud of all that they do. When we equip more people to make good financial choices, everyone benefits. It makes our profession more trustworthy, reinforces our value, and adds to our client base.
But the key challenge still remains: How do we answer the question:
What is finance for?
Is it for us, the professionals? Or is it for the benefit of our clients, the businesses they invest in, and the communities they live and work in?
I said I would share four steps that we as a profession must take to address these challenges.
First, we must revise our business models.
In the United States, investment professionals still enjoy an operating margin of 34 to 39 percent. Yet, in our recent “Future State of the Investment Profession” report, we found that nearly half of respondents questioned the value we deliver as an industry for the fees that we generate.
The image of the investment professional who always prospers, whether the client sinks or swims, has got to change. And changing it is up to us.
We inhabit a “fee bubble,” a little like a housing bubble. We must do better if we are to justify our fees and we must tie them more obviously to the value that we create for society.
The second step: I want CFA Institute to take the lead in earning back trust.
I want us all to help with that work. I want us to stand even more vigorously and vocally for candor and transparency.
Leading with candor means being realistic about our clients’ actual retirement prospects, even when it hurts us to be that honest. It means taking clear stands against products and practices that put investors at a disadvantage.
Leading with transparency, and putting our clients’ interests above all else, means we must engage with regulators everywhere so they protect investors without unduly tying the hands of businesses. We, as a profession, must earn the right to drive the regulatory agenda. If we fail to do so, then we must expect that regulation will be invasive and unduly onerous. We must make it clear who is trustworthy. This is why we need to work hard to establish the CFA designation as the hallmark of trustworthiness in the public’s mind.
The third step we must take is to recruit more of the right kind of people.
We need more people in our professional ranks who have clear ethics and a sense of purpose. People who see this career as a way to do a lot of good as well as a way to make good money.
There’s nothing wrong with making good money, of course. But there can also be a wider dimension to advising investors and to creating wealth. A sense of purpose. We want people in our profession who are motivated by more than just money.
And we are partnering with industry firms to try to build this sense of purpose. Today, I’m very proud to announce our second groundbreaking institutional partnership with Bank of New York Mellon. Together, with our support and input, we will produce with BNY provocative thought leadership research that complements our future of finance work, including a very exciting upcoming paper on ESG. You may recall, this time last year, we also partnered with State Street with whom we published, at the back end of 2016, a groundbreaking report — “Discovering Phi: Motivation as the Hidden Variable of Performance.” And if you haven’t already, I would encourage you to visit our website and download that report and also the “Future State of the Investment Profession” report. Both of those can be found in the Future of Finance section of our website.
We see too much passion in our profession that is unattached to purpose. We need to change our hiring practices and our incentive structures — so we employ more people with higher-level emotional and cognitive ability.
Not incidentally, we also need more diversity in our ranks. Diversification, as you all know, is a core investment principle. But it is infrequently applied to the composition of teams at all levels of the investment profession. And not just gender, but other diversity dimensions such as ethnicity, culture, and work style. CFA Institute is well-equipped to be a change agent for diversity because diverse teams are better at meeting client needs, and our designation is truly accessible and attainable by all, whatever the background it is that you come from.
The fourth step we must take involves our attitude toward new technologies.
We must adapt to them before they disrupt us. We must complement and harness these new forces, not fight against them.
Too many professionals tell me that they fear new technology and see it as a threat. But we are far better off viewing new technologies as opportunities, forces that can dramatically expand our market opportunities.
For 20 years, we have seen disruptive technology pulverize established business paradigms: the music business versus Spotify; yellow taxis versus Uber; storefront travel agents versus Expedia. And we know how those battles ended.
But Spotify, Uber, and Expedia did not destroy their verticals. They enlarged the pie for better-positioned players. They provided better value. And in our industry, those firms that provide the most value to investors will survive and thrive.
The technology revolution is inescapable. Tasks we do personally today will be automated tomorrow. But that does not erase your role as an investment professional.
No application, no software package, can advocate for investor interests like you can. No software can create the value that you can. No software can assess the risk and understand the mechanics of investing. Our business is truly a personal one. Only you can address the client’s long-term dreams and fears. So use technology to deliver more consistent advice and to serve more clients: in short, to do a better job!
So when we add up the challenges we face and the actions I believe we must take, and the picture does not resemble business as usual. I believe our profession stands at an inflection point.
In the life of a business, an inflection point is a moment of truth where fortunes hang in the balance. Inflection points can, of course, go either way. They can presage new prosperity — or signal the onset of a death spiral.
What happens to us depends on our vision, wisdom, and willingness to take action. It depends on leadership!
We have to better prove the very point of our profession.
Our markets were designed to provide businesses with access to capital — structures that date from the 19th century. Things have changed since then.
Today’s capital markets are frequently the stage for secondary transactions that get no cars or planes built, employ no workers, throw off little tangible value to society. Today, our purpose is no longer always apparent to our clients.
But it ought to be.
At its core, investment management is about matching investors with opportunities. The fundamental purpose of finance is to contribute to society through increases in societal wealth and well-being.
There is no shortage of potential primary market transactions. Infrastructure is crumbling in many parts of the world or is yet to be built. The planet is suffering from environmental and social degradation. The financial inclusion of millions of people can become the rising tide that lifts all boats. Are we active enough in seeking out these opportunities?
The decoupling of market activity from Main Street prosperity has made some investors cynical, wary of what they think is a profession in a bubble — run by people who are in it only for themselves.
But we ought to give them reasons to believe that we serve a valuable role in society.
We ought to give the younger generation hope because they face a tougher world than their parents did.
And we will do it by getting back to basics.
We cannot be shy about working to get our industry focused on redefining value, and reclaiming trust. More than any other criteria, we will be judged in this era on our professionalism. I appeal to you, as I close, to breathe life into the idea of a “new professionalism.”
When we succeed at these things, we all prosper. When we make investing more relatable and transparent, our businesses will enjoy greater success. That is how we keep opportunity alive for those who follow us — while measurably improving our own opportunities today.
CFA Institute is here to provide vision, wisdom, and leadership. We are a leading force for global change and so are our societies and members in their own communities. We are an organization of trusted and honorable professionals who seek — first and foremost — to do good in the world.
For ourselves and for society, my professional colleagues — that is the kind of value it is our destiny to create.
Thank you very much.
Follow the 70th CFA Institute Annual Conference online with the Virtual Link. It’s an insider’s perspective with live broadcasts of select sessions, exclusive speaker interviews, discussions of current topics, and updates on CFA Institute initiatives.
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Photo courtesy of W. Scott Mitchell