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The decade since the 2008 global financial crisis has seen more stringent capital controls, regulation aimed at improving professionalism among financial advisers and outlawing incentives that don’t work towards good client outcomes. Oh, and strong stock market growth.
And yet one fact remains a constant: consumers lack trust in financial services. A recent whitepaper from the Transparency Taskforce attests to this (available for download here) and assesses the reputational damage done by market events such as the dot-com bubble and the credit crunch.
As part of our Retail Customer Interests Study, we recently held focus groups with private investors – both DIY and semi-advised – to understand what ‘trust’ means to them and how it can be earned or eroded in the context of asset management. Investors’ holistic definitions of trust included “confidence in an ongoing partnership”, “feeling safe”, “have my interests at heart as well as their own” and “follow my ethics”. These emotive descriptors were not inspired by trust in asset management specifically, but that doesn’t make them any less valid in that context. People are more inclined to trust industries or brands with which they feel they have a long-term, two-way relationship characterised by dependability and confidence in what’s being offered.
Conversely, lack of transparency, socially unjust or deceptive behaviour, not acknowledging or rewarding customer loyalty and broken promises chip away at trust.
Factors contributing to and corroding trust can easily be applied to the Great Rise and Fall of Woodford. Beloved by investors for his long track record of delivering investment performance and the regular flow of information he provided – including look-through of his entire portfolio and investor Q&A responses – his fall from grace has been sudden and brutal. On Friday, BBC News published an article focused on the human cost of the Woodford Equity Income debacle, aptly titled People who trusted Neil Woodford with their money. The upshot of the article is that investors didn’t realise that the fund could be suspended and as such, feel a sense of injustice. It also suggests a lack of transparency – where were the risk warnings? Should consumers be expected to understand the risks associated with investing in unquoted stocks in an open-ended fund?! Should the fund have been promoted by Hargreaves?
Woodford’s woes certainly don’t do the asset management industry any favours in terms of gaining, or regaining, consumers’ trust. Yet it’s not all doom and gloom. Perhaps it’s simply time for a new breed of investment superhero. If the X-Men franchise can embrace a female lead, can we do away with our dated conception of a star manager?
Going back to our private investors’ definitions of trust, how can the asset management industry appear more dependable and give confidence when there is always the risk that investments don’t pan out? How does it engender that feeling of partnership or alignment with personal ethics?
Responsible investment could go a long way to earning the trust of a wider pool of consumers, as well as rebuilding trust among current investors who’ve lost faith. The story is about investing in the future, engaging to improve things, longer-term returns, and not contributing to harmful practices or industries. Investors can even choose to have a positive impact. The potential relationship between a consumer and an asset manager can be deeper and more multi-faceted if it is not just built on investment return objectives – such a relationship is merely transactional. And if performance is lacking one quarter, the sustainability fund manager still has something to offer the investor in terms of ‘bigger picture’ stuff and reflecting their values and beliefs.
Of course, responsible investment is not philanthropy and in its most basic form, environmental, social and governance (ESG) integration is about protecting performance rather than ‘doing good’. It will also be important to communicate this message to investors. But one shouldn’t ignore the trust that could be earned by reporting to investors that their money has translated to x tonnes of greenhouse gas emissions avoided or x fewer litres of water wasted.
The potential for creative, engaging and compelling communication around responsible investment is actually one of the exciting things about it. WHEB’s Impact Calculator and Rathbones’ recently-published In pursuit of green report are just a couple of examples of information more likely to captivate your average private investor than a piece of commentary on how you’re a high-conviction, bottom-up stock picker (sorry, but it has to be said!).
More fundamentally, the image of an industry in tune with modern realities – the climate emergency, threats to global food stocks, heightened consumer consciousness, the diversity movement – is more likely to be trusted than one dominated by past performance figures, financial jargon and sharp suits.