Trust, liquidity and long-term savings

David Masters assesses the reputational challenges facing the asset management sector following recent issues and forthcoming regulatory change.

 

There are a challenging few months ahead for asset managers. August sees the need to clarify fund objectives and benchmarks, and from 30th September, fund managers will be required to start delivering assessments of how their products deliver value for money to end investors. Then, on 9th December, asset managers will be in receipt of an early Christmas gift/piece of coal from the FCA’s Santa sack on the shape of the Senior Managers & Certification Regime (SMCR).

But casting a lengthy shadow over all of this is the gating of the Woodford Equity Income Fund in early June and its implications for the reputation of the asset and wealth management industry. The event itself is well-documented, so apart from sharing my suspicion that there is probably still a lot more to be learnt about what happened, it’s better to focus on the bigger picture.

It reminds us how ill-equipped this industry remains when dealing with matters of such intense public scrutiny. Whilst it would be easy to criticise how Woodford Investment Management responded publicly at times, its more pertinent to ask ourselves how many asset managers, large or small, would have fared significantly better in a similar situation?

This represents a challenge. Particularly as the asset management industry has increasingly sought to highlight its social value. The corollary of this is that the views of policymakers and opinion formers matter more than ever in defining the reputation of the sector. Moreover, governments around the world need the industry to deliver on this promise of social value. They need asset managers to be very genuinely helping deliver better long-term financial outcomes to as many of their electorate as possible. They need asset management to be ‘for the many’ rather than the few. They need those future pension liabilities off their books.

Thus, if the sector behaves in a way which means that investors don’t trust fund managers enough to use them, governments will be forced to act, which means even tougher regulation and penalties.

Trust in financial services is primarily based around the idea that those people given consumers money to safeguard or invest won’t refuse to give it back when its asked for. Less access is acceptable if it comes with a higher reward, if that trade-off is made clear.

When something comes between the public and their money there is usually significant fall out. Fear of not being able to access one’s money is what causes a run on the bank, not just in Mary Poppins’ style fantasy but in very real Northern Rock style life. From a reputational perspective, denying customers access to their cash is as toxic as it gets.

Herein lies the dilemma. There is a relationship between levels of trust and liquidity. In a market where there is proliferation of similar products, retail investors are faced with a huge choice from providers they don’t necessarily have huge faith in. It’s hardly surprising, therefore, that they favour funds which offer high liquidity, the post GFC popularity of ETFs is no fluke, and therefore the ability to change their mind with impunity.

This creates a further challenge. The transition to individual responsibility for retirement savings has meant that, in a ‘lower for longer’ rate environment, too many savers and investors are exposed to the wrong sort of assets and the wrong sort of risks. Therefore, the current initiative to set up fund structures that offer the appropriate liquidity profile to match less liquid underlying investments and the investor’s objectives is spot on.

But there’s a potential problem. Yes, it provides the opportunity for higher return in exchange for restricted access, but if investors don’t have enough trust in providers or advisers, will they be willing to take the plunge? And how will they respond when, as will invariably happen, asset prices go through a rough patch?

Rather than mollycoddle investors into doing what we think is best for them, we must bring them with us. We need to regain their trust. We need to rebuild our reputation with them.  That will require concerted, coordinated effort that must come from inside the asset management sector.

There is already a great deal of excellent work taking place within the industry, the myriad of initiatives under the Diversity Project spring immediately to mind, but the challenge as ever is if the rate of change. At present, this is insufficient to convince policymakers, regulators and the persistently sceptical general public that anything material is happening.

As an industry we should not wait until times of crises to get our house in order. We always need to clear about our purpose and our value proposition, so that in tougher times we can focus our efforts on reassurance rather than reputational recovery. For us to shift public perceptions, CEOs and Boards need to provide greater top down impetus to accelerate a more integrated focus on reputation management, and communication professionals need to be providing a similar upward thrust. Our role is very much to unite those forces and build momentum.