Earlier this week Christian Dreyer, CEO of CFA Switzerland, outlined his three steps for a better investment industry. The topic has garnered much attention due to the upcoming ‘Fiduciary Rule’ in April 2017 (requiring advisors to put client interest above their own). The CFA Institute has been a key supporter of the fiduciary standard while promoting measures to regain credibility within the investment industry.
The fabric of Pure Portfolios was based upon higher ethical standards for investment professionals, accountability for investment results, and full transparency around fees and conflicts of interest. Therefore, I created my own list that complements Christian’s work:
Raise the Barriers to Entry for Financial Advisors/Investment Managers
Regulators:Build out a more rigorous curriculum for aspiring investment professionals. More emphasis needs to be placed on ethical standards, conflicts of interest, and transparency. Promote and require designations that show a dedication to higher learning (CFA Charter, CFP, CIMA, CAIA).
Companies:Hire professionals that have shown a commitment to furthering their education. Create incentives and compensation arrangements that promote better client outcomes while maintaining a profitable business. Promote a culture that places client and investor interests first.
Investment Professionals: Commit to placing client outcomes and the integrity of financial markets above all else. Expose and exclude others that work directly against clients. Stay current on trends and skills needed to serve clients well.
Clearly Distinguish Salespeople from Investment Professionals
Regulators: The confusing DOL Fiduciary Rule could be much cleaner by distinguishing between salesperson and investment professional. The criteria would be based upon compensation incentives, behaviors, line of business, and professional designations. Potential investors would be made aware, prior to any commitment, if they were working with a salesperson or investment professional.
Companies:Embrace and promote the fiduciary standard.
Place More Emphasis on the Performance of Client Assets
Regulators:Create a uniform set of standards for performance reporting. Returns should be quoted gross and net of fees. Fees should also be quoted in percentage and dollar terms. Performance reporting should be audited annually to ensure accuracy.
Companies:Make performance readily available and easy to interpret for existing clients. Create composite performance for all model portfolio strategies for potential clients. Disclose any conflicts of interest or material changes to underlying strategy or model (i.e. investment manager leaving). Compensation should encourage prudent portfolio management, (not asset gathering).
Investment Professionals:Clearly articulate rational for portfolio construction and the factors that influenced performance. Highlight returns both gross and net of fees. After tax performance and capital gains for the current period should also be available.