How to repair the trust

The investment management industry should work to rebuild trust with investors through a ‘back-to-basics’ client relationship approach, combining improved communication and education, increasing knowledge sharing, and bolstering corporate governance and risk management transparency, contends a new investment management report entitled: “Renewing the Promise: Time to mend relationships in Investment Management”. KPMG International commissioned Datamonitor to undertake the research; the results of which were recently launched at Fund Forum International in Monaco. The Journal reports.

Overall, the results show that better communication holds the key to future success. These lines of communication should flow not only from investment managers to their clients, but also, crucially, from investment managers to intermediaries and to regulators, as they will play a fundamental role in repairing the trust that has been broken. This message of the need for more effective communication manifests itself in a variety of ways, including calls by investors and intermediaries for additional training and transparency on product and strategy, for explicit vocalization by investment managers of their adherence to an industry best practice code of conduct and for more direct, face-to-face time with managers, among others.

In terms of the breakdown in trust, interestingly, the research highlighted that financial intermediaries – client-facing advisors – in particular, are perceived as being untrustworthy and lacking knowledge, perhaps as a result of poor education by investment managers on complex products and risk management practices. In fact, 77 per cent of investors overall felt that intermediaries are less trustworthy than politicians. To combat this, 58 per cent of institutional investors believe that investment managers should provide financial intermediaries with better product training in order to help them regain client trust, a sentiment matched by 75 per cent of investment managers themselves. 

Responding to the research, Anthony Cowell, co-editor and partner, KPMG in the Cayman Islands, said: “At this time of market turbulence and broken trust, the investment management industry should adapt and change to re-engage investors. Open communication amongst all market participants is particularly critical, and investment managers and intermediaries must forge collaborative, knowledge-based partnerships, focused solely on the client. Only by implementing a joined-up approach, supported by better corporate governance and risk management, can the needs of the investor truly be met.”  

Notably, the research showed that managers do not have faith in their own senior-level management being able to drive this necessary change, especially with regards to risk management and corporate governance procedures: 65 per cent of investment managers globally cited lack of vision by top management as the major obstacle to change, leaping to a staggering 90 per cent of managers questioned in the US. 

A lack of vision at the top is not the only obstacle to change and progress, however. The report also showed that the inevitable cascade of regulatory change is likely to significantly hamper the industry, with 81 per cent of respondents believing more regulation will remove opportunities for innovation going forward. There are also significant concerns regarding the cost impact of a new regulatory regime; 72 per cent of participants feel that a regulatory clampdown will seriously increase costs for investment managers, and 63 per cent think investment managers will not be able to pass on these associated costs to their clients.

Commenting on the report, Mark Harris, senior manager, KPMG in the Cayman Islands, said: “The investment management sector is braced for regulatory change, and is ready to learn its lessons from the financial crisis. More than ever, the ‘time is now’ for true engagement between the industry and the regulators to shape the future of the investment management landscape.

Not everyone is agreed on where this regulation will fall though. For example, 53 per cent of institutional investors believe that risk management and internal controls will be more strictly regulated in the future, whilst investment managers feel the focus will be on leverage limitations (77 per cent). 

Anthony Cowell concluded: “Events of the past year have once again put the issue of trust into sharp relief, and it is fair to say that the credibility and reputation of the investment sector has been damaged. It is little wonder that investors, faced with the realities of plummeting stock markets and portfolios, have questioned the integrity of the investment management industry. This research clearly shows that constituent parties in the investment chain are not communicating with each other to best effect.  The industry should find ways to open these lines of communication once more, and by doing so, rebuild the trust of investors.”

To download a full copy of “Renewing the Promise: Time to mend relationships in Investment Management” go to www.kpmg.ky.
The information contained herein is of a general nature and is not intended to address the specific circumstances of any particular individual or entity.

© 2009 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

 

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Anthony Cowell, Co-Editor and Partner, KPMG in the Cayman Islands; Mark Harris, Senior Manager, KPMG in the Cayman Islands

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