Trust between investors and asset managers has been destroyed by the transactional nature of the investment industry, according to John Kay, visiting Professor of Economics at the LSE.
Speaking at the Russell Investments Annual Pensions Conference, Kay said: “Relationships are personal and formed on the basis of trust, whereas transactions and trading exist in an environment of seeking advantage and suspicion. Participants know more about what other traders are doing than about companies these days.”
Kay was also critical of reams of new regulation being forced on the markets, calling the recent regulatory pushes “wrong-headed” and “flawed”.
“All our experience of regulation of other industries tells us that behavioural regulation just diminishes trust and proliferates complexity.”
Why should we care about a lack of trust? Because the results of maintaining the status quo will be worse and more frequent crises, according to Kay.
“The view that systemic crises, such as Tulip Mania, the South Sea Bubble, the Great Depression and the high-tech boom and bust, are inevitable misses the point that crises are becoming more frequent and larger in amplitude.
“I fear that we will move from crisis to crisis, driven by the disfunctionality of financial services,” he said.
To solve the problem, financial services must become more stream-lined, with fewer intermediary chains for transactions, or as Kay put it “a world in which there are one or at most two intermediaries between savers and borrowers”.
If that all sounds a bit gloomy, that’s because it is. But fear not, UK asset managers, for the Investment Management Association (IMA) has got your back.
On June 5, the IMA’s annual Mansion House dinner sought to reassure fund managers that at least in London, asset managers were starting to regain any trust lost during the financial crisis.
Douglas Ferrans, chairman of the IMA, said the first step was to reconnect with investors and understand what they need and how best to serve those needs.
“The second is to demonstrate why we deserve their trust and confidence,” he continued.
“We need to ensure that when we spend our clients’ money, we do so with real skill and diligence. We must ensure that when we face issues that give rise to potential conflicts of interest, we are able to think independently and put our clients’ interests first.”
Talking about how the industry tackles the challenge of effective engagement with companies in which it invests, Ferrans said: “There is a very mixed approach in this area among investment management firms. The challenges in effective engagement are well-known and I have in the past defended the right of our firms and clients to decide how far down this path they individually go.
“However, as an industry, this is an area that cannot and should not be ignored.”
So, become more streamlined or become touchy-feely and listen to your clients? Ultimately, aiCIO suspects how asset managers go about regaining trust will boil down to how much they have to spend.