What institutions are willing to pay more for
Institutional investors have set out what they expect as standard from asset managers, what they are willing to pay extra for and what they regard as differentiators.
According to a study of 500 institutions globally by the CFA Institute, they expect certain things of managers without having to pay more for them: that they have adopted an industry code of conduct, have not suffered compliance violations and communicate their commitment to ethical behaviour. Moreover, they expect firms to set their fee arrangements so their financial interests are aligned.
What they valued and were willing to pay more for included full disclosure of fees and other costs, acting in an ethical manner in all interactions and provision of reliable security measures to protect data.
They said they were also prepared to pay more for returns similar to or better than the target benchmark and/or peers (in comparable products) and for taking the time to understand their organisation’s priorities, liability structure and political dynamics in respect of various stakeholders.
Paul Smith, president and chief executive of the CFA Institute, expressed surprise that full fee disclosure was not something that institutions automatically expected.
“That is a trust issue,” he said. “If you were to be cynical, the industry could see this as an opportunity to be paid more. But to me it is indicative that [investment managers] are not doing the basics.”
Referring to the findings of the CFA's retail investor survey, Smith had suggested the industry was seeking to compete on performance rather than on transparency, disclosure and easy-to-read reports, as reported.
Asked what they believed differentiated investment firms from each other, the study highlighted those that acted as a partner in problem solving, going beyond a specific mandate to lend insight on investment concerns; proactive communication on market dynamics and their portfolio impact; and employing investment talent with credentials from respected industry organisations.
As for what would prompt them to leave an investment firm, the top answer from institutions was underperformance (60%), followed by increase in fees (50%), data/confidentiality breach (45%) and lack of communication/responsiveness (40%).
Institutions appear to be saying that they value transparency over returns, but while they are prepared to accept lack of the former, they are not prepared to tolerate underperformance (particularly if they feel it is not being well communicated).
What is also clear from the survey is that environmental, social and governance factors still barely register in the thinking of institutional investors. ESG was at the bottom in terms of what they said mattered most to them, along with thought leadership and being quoted in the press.
Meanwhile, only half (49%) of institutions said they felt investment managers were well prepared or very well prepared to manage their portfolio through a future financial crisis, which was slightly more pessimistic than the response from retail investors (52%).
This also met with slight surprise from Smith, who noted that retail investors if anything had more reason to be fearful on account of the fact that their portfolios were typically less well protected.
“The way regulators work to inhibit the [retail] industry from taking protection, whether through restrictions on derivatives or hedging, is a misunderstanding of risk,” he noted. “I have never understood why retail investors should not be able to capture downside risk. This is a regulatory landscape that does not deliver what people need. There are far too many in long-only products.”
* The CFA Institute, with help from Edelman, interviewed 3,312 individuals with investable assets of more than $100,000 in the US, Canada, UK, France, Germany, Australia, China, Hong Kong, Singapore and India; and 502 institutional investors in the US, Canada, UK, Australia, Hong Kong and Singapore.