There can’t be many people working at a senior level in UK asset management who wouldn’t admit, if only privately, that the industry has a trust issue.
It’s nearly three years since Daniel Godfrey was ousted as head of the Investment Association for trying to persuade its members, not unreasonably, to put their clients’ interests ahead of their own.
Since then, investigations by the Financial Conduct Authority and the Competition and Markets Authority have unearthed serious issues around barriers to competition, conflicts of interest, and a lack of transparency around fees and charges as well as the reporting of fund performance.
Despite concerted efforts by the likes of the Transparency Task Force, Dr Chris Sier, Gina Miller and my own blog, The Evidence-Based Investor, to keep these issues in the public eye, restoring trust is proving to be a painfully slow process.
I can see why the industry as a whole is procrastinating. For years it benefited from a range of factors, including significant political influence, light-touch regulation and a largely compliant financial media. It consequently enjoyed a level of profits that other sectors can only envy. The good old days are coming to an end, but you can understand why the trade bodies want to drag them out for as long as possible.
What I do find puzzling, though, is why we aren’t seeing more fund houses breaking rank and setting out their stall, if not as consumer champions, at least as firms that have their customers’ interests at heart.
We’ve all watched in awe at the extraordinary growth of Vanguard in the United States. No, Vanguard isn’t perfect, but it’s profited by doing the right thing by investors, and most of all by establishing trust.
So, how can UK asset managers emulate Vanguard and create higher levels of trust? A book published earlier this year — The Trust Mandate by behavioural science experts Herman Brodie and Klaus Harnack — provides some possible answers.
Our decision to trust someone, say the authors, is based on two independent judgements about the trustee. The first judgement is about competence. In other words, does this fund manager have the skill, resources and so on to deliver good outcomes for us?
But the second judgement, say the authors, is actually far more important. It’s all about the other person’s intentions towards us. Do they care about us? Do they genuinely want the best for us? Or, given the opportunity, would they use their competence to further their own interests over ours?
Doctors, who generally command a high level of trust, are able to focus on satisfying that second requirement; after all, most patients take it for granted that they’re competent. It’s the extent to which doctors care — asking patients how they are, listening to them carefully, showing concern and so on — that determines how much trust is placed in them.
Fund managers, on the other hand, often focus too much on trying to demonstrate how clever they are, and not enough on showing that they care.
Charles Morris, Chief Investment Officer at Newscape Capital Group, hits the nail on the head in his review of The Trust Mandate when he says: “Too many fund managers ooze competence but lack warmth. Big watches, showing off superior intelligence and bragging about past winning trades put clients off. Instead, we should learn from the firefighters, who are heroic and trustworthy.”
Simply put, clients care more about how much fund managers care than how much they know, and firms need to be better at conveying their good intentions. To quote from the book, “one additional unit of warmth will bring (asset managers) closer to a high-trust relationship than one additional unit of competence”.
You would expect me to say this as a content marketing consultant, but the best way to show that you care is to produce and share regular content that reinforces that message. Firms can steal a march on their rivals by showing, for instance, that they’re serious about fee transparency, and not dressing up the data to make their past performance look better than it actually is.
Brodie and Harnack, say that fund managers that succeed in building trust can expect to win more businesses. They argue, too, that clients are more likely to stand by a manager they trust during periods of underperformance. They also, apparently, are comfortable with them taking more risks, and are even willing to pay higher fees.
Granted, fund managers may never enjoy the sort of trust commanded by doctors. But there’s plenty they can do to start closing the gap.