Trust in financial services industry falling among institutional investors, finds CFA Institute

The big question

Institutional investors have reported lower trust in financial services, with the number saying they trust the industry falling to 65 per cent, down from 72 per cent in 2018.

The CFA Institute’s survey revealed diverging attitudes between retail and institutional investors, as retail investors were less trusting overall, but trust was on the rise. Only 46 per cent of retail investors said they had trust in the industry in 2019, but this was a small uptick from 44 per cent in 2018.

“Institutional investors’ lower trust may be related to the additional information they have about the system and the underlying assumptions of individual participants,” says CFA Institute. 

Among the institutional investors surveyed, 45 per cent were from corporate or government funded defined benefit pension plans, and among these, 56 per cent had lowered their target rate of return within the last three years. 

In addition, 48 per cent said it is likely or very likely (greater than a 60 per cent chance) that their fund will not be able to pay all of the benefits in the next 10 years, and another 37 per cent said it is possible (40 to 59 per cent chance) they will not be able to pay.

“The reality of a combination of continuing fiscal deficits and demographic stresses (both increased longevity and smaller workforces supporting retired populations) is increasing the challenges of meeting future state benefits, however, and investor confidence in state-sponsored benefits does not necessarily correlate with the ability of these funds to meet their obligations.

“While the investment industry may wish to avoid this subject as one it cannot control and did not create, in reality the industry is accruing a deferred trust deficit on its collective balance sheet,” says CFA.

The CFA Institute’s fourth annual trust report surveyed 4,000 retail and institutional investors in 15 markets, to gauge the views of investors toward the behaviour of investment firms and professionals who are entrusted with their money.

“Trust is the number one factor globally for retail investors when hiring an adviser, and for institutional investors trust and performance are most valued when hiring an asset manager,” says the CFA Institute.

It explains: “Transactions cannot occur effectively without trust, whether it is the purchase of a small security or the controlling interest in a multi-billion-dollar firm. Research has shown that people who are generally less trusting are less likely to participate in the stock market. For the investment industry, the question is, What does it take  for someone to put their capital at risk and entrust their funds to someone else to manage?”

When it came to fostering trust, two thirds of institutional investors said that the use of technology amplified trust in  their investment firms. Other factors included full disclosure of fees and other costs, which 75 per cent agreed was one of the important items in creating a trusted relationship. 

Although the majority of investors (73 per cent of institutional investors and retail investors with an adviser) believe the fees they pay are fair, high fees are one of the top reasons retail and institutional investors give for considering leaving an investment firm or adviser.

In the current time of market volatility, Margaret Franklin, CFA, President, and CEO of CFA Institute reiterates that “the need for trust in institutions and in the advisers who act on behalf of investors, as well as the financial system in which they operate, becomes starkly apparent”.