Keeping an eye on the prize despite uncertain 100 days

The early days of the Trump administration have been action-packed, with everything from an alleged Russia connection to some of its staff to a tooth-and-nail battle over the future of the Affordable Care Act. Meanwhile, amid the 30-plus executive orders to date there are two, in particular, that have the potential to deal a sharp blow to American investors and the investment management industry.

The delay in the implementation of the Department of Labor's fiduciary rule and proposed scaled-back provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act raises questions about the commitment of the administration to protecting investors, although some professionals might see this as breaking a yoke that is holding back our industry. And perhaps there will be short-term gains, but at what cost?

None of us needs reminding of the 2008 global financial crisis and its aftermath. But after years of hard work rebuilding trust in the financial services industry and in its willingness to put its house in order, the global economy is mostly back on track.

However, by threatening to rescind the DOL fiduciary rule, the Trump administration is telling investors that financial advisers' commissions and the firms' profits are more important than investors' retirement nest eggs. The optics certainly are not good. The order signals that fiduciary responsibilities are fluid, when, in fact, our commitment to every client's best interests should be set in stone.

To put the industry's trust problem in perspective, a study of CFA charterholders and other investment professionals published this month by CFA Institute, “The Future State of the Investment Profession,” found 67% of respondents in North America believe the sale of inappropriate products to clients is commonplace. Moreover, we found that one in four wealthy individuals choose not to take wealth management advice, in part because they do not believe advisers act in their best interests. Perhaps one of the most damning findings was that nearly one half of respondents questioned the value delivered in return for asset management fees. This is our own profession's view of the value we are providing!

So, do we really want to turn back the clock? Or are we prepared to do what is right to maintain our clients' trust?

President Donald Trump's executive order concerning the future of financial regulation might have left some unsure what this means for the industry. But I am encouraged to see how many firms are still moving ahead with implementing right-minded policies and procedures that reflect the spirit of the DOL rule, and their sincere commitment to delivering the best possible results for their clients 365 days a year.

Morgan Stanley, for example, will implement very important changes to its business regardless of the final outcome for the DOL rule. And JPMorgan Chase & Co. CEO Jamie Dimon, in his annual letter to shareholders, echoed the importance of intelligent regulation and a transparent financial system.

There are signs of waning momentum in the U.S. stock market while, in the global arena, geopolitical risk has returned with a vengeance. Investors are concerned the world is heading to a dark place. But geopolitical risk is not new; it is presenting itself in different guises. We never thought geopolitical risk would emerge in the Western world, but developments in the U.S., the U.K., France, Italy, Spain and perhaps even Germany are significant for markets. However, depending on where you are, the risk has never gone away. When I speak to CFA charterholders in China, for example, their main focus is political. Monetary policy, government edicts, changes in taxation are all part of life in China. The same holds true in many other countries. We have forgotten in the West that politics are important and now they are playing an increasingly influential role in financial markets; an unwelcome irony, perhaps, as these new risks are at least partly due to failures of the financial system.

The investment management industry is at an inflection point, and investment management professionals have a critical role to play in addressing geopolitical risk and providing better outcomes for investors. But it has to fight for its right to play this role and prove its value to clients. We need to restore trust in the industry and act as the trusted adviser we used to be.

At CFA Institute we see not just political uncertainty. There are other headwinds facing the asset management industry. We have witnessed increased consolidation across the industry, plus a significant shift in capital to passive management from active. Technology is disrupting the buy-side in the same way that it already has done on the sell-side, ultimately leading to fewer jobs, and robo-advisers are challenging the raison d'être of human financial advisers. And as the investment landscape evolves in a low-interest rate environment, so do the wants and needs of clients.

The implication is clear: The investment management industry has to change the way it does business in order to remain relevant.

The investment management industry cannot afford further erosion in investor confidence. Today, clients want more than investment options; they want a holistic planning experience that incorporates every aspect of their multifaceted lives. It is vital to remember that by focusing on clients' best interests, we are securing the industry's long-term interests as well.

The regulatory and geopolitical environment might be uncertain, but that should not derail our efforts to provide client-focused solutions that add value for today's investors and that connect finance to its purpose of helping capital flow. Geopolitical risk presents opportunities too, if we are prepared to take advantage of it.

After all, we are only at the first 100 days of the president's administration. There is still time over the remaining 1,300 days of his term for Congress to reform taxation, introduce the promised investments in infrastructure and revivify a sluggish economy. Measures like these will rekindle investor confidence, promote greater participation in capital markets, and help create new value for the industry and its clients.

Paul Smith is the Hong Kong-based president and CEO of the CFA Institute. This content represents the views of the author. It was submitted and edited under P&I guidelines, but is not a product of P&I's editorial team.