This week WHEB Asset Management, along with partners Social Finance and Abchurch Communications, hosted a seminar under the somewhat ambitious heading of “Only Connect: Trust, Credibility and the Future of the Investment Industry”, as part of National Ethical Investment Week.
Insight was provided by panellists Catherine Tillotson of the Scorpio Partnership, Richard Brass of Berenberg Private Bank, and Alexander Hoare of Hoare’s Bank. Anthony Hilton, Finance Editor of the Evening Standard, was in the chair. The discussion flowed freely around four questions set to the panel, covering client expectations, innovation, engaging mainstream investors, and the response of the investment industry.
No-one is in dispute with the contention that trust is a major issue for the wealth management industry, indeed for the whole of the financial services industry, in the wake of the last five years of what Australians call the GFC (global financial crisis). Understanding and managing client expectations, everyone seemed to agree, is critical for rebuilding trust, whether around social or environmental investments or indeed any other aspect of client advice.
Cath Tillotson presented some of the results of Scorpio’s recent survey of both High Net Worth Individuals and their advisors, which show that clients place significantly higher value and greater importance on issues such as engaging in civil society, investing ethically, environmental responsibility and charitable activity. This gap in emphasis potentially translates into a shortfall in the service that advisors are providing their clients. Understanding a client’s broader charitable, societal or environmental aims and objectives is actually an opportunity for advisors to deliver better service, and build long-term relationships.
On this topic, Richard Brass contributed a memorable analogy to American cyclist Lance Armstrong: although a large majority of those in the room felt he should be stripped of his seven Tour de France titles, many fewer thought he should be made to return the more than $470m he has raised for cancer charities during his career. Listening to how investors approach ethical questions over how money is made, and the philanthropic benefits of giving it away, will help rebuild trust.
To provide access to a broader set of products and services, including impact investments, and to change the nature of the advisor relationship will require innovation, but the experience of the GFC has made many very wary of innovation in financial services. So it was interesting that Richard and Catherine both thought innovation would be needed as an enabler: in order to accompany the client on its financial journey, at some point it will always be necessary to think creatively. They acknowledged, however, that there were limits to innovation, as complexity hurts trust. Alexander Hoare agreed, quoting what was described as Harper’s Law: that all progress leads to inconvenience.
There is also clearly a regulatory impediment which makes advising on some types of investments next to impossible, even though they might be desirable from both a client and a societal perspective. Such pressures have almost become more difficult in the last few years, as regulation has responded to try and protect consumers in the wake of the GFC. Following the debate we reflected that there may be a strong case for the industry to come together to tackle these issues collaboratively with regulators.
Questioned on whether sustainability and impact investors could lead the way to rebuilding trust in the industry, the panellists could see possibilities but also hurdles. Some thought that leading with SRI-related products could help re-engagement for individual client portfolios. On the other hand, because the agenda is so broad, it is difficult to generalise on whether this approach would work for all. There are so many approaches that sit under the banner of Sustainable and Responsible Investing, which all have different implications for financial risk and return and suitability, but tend to get categorised as one group. This has created an experience and knowledge gap which could be bridged through using 3rd party relationships. Richard commented that using specialist expertise in relation to specific advice might help strengthen rather than risk undermining relationships, as many might fear.
There were some very thoughtful ideas as to what bold steps the investment industry could take, to bridge the ‘trust gap’. One popular suggestion was that questions about investor attitudes to sustainability and impact issues should be required as part of the ‘Know your Client’ process for advisors, alongside e.g. suitability questions. Forthcoming ISO22222 standards do actually go some way towards addressing this question, but the scope could be expanded further. Another popular idea was that education, of advisors as well as investors, had to be part of the solution, as did a clearer regulatory framework. A strong theme was that time is perhaps the best healer, i.e. a long period of rebuilding trust through good behaviours, was the only thing that would really succeed in ‘re-connecting’ the investment industry and its clients. At the same time success will breed success, so if we can build examples of products that really meet clients’ long-term aspirations and objectives, and celebrate them, then others will follow.