One of the major developments of our times is the decline of public trust in a range of important institutions, including government, the democratic process, the judiciary, churches and big business―especially large financial firms.
The trust deficit is particularly evident right now in the Australian banking sector as a Royal Commission, launched in response to recent instances of misconduct, gets underway.
In my own industry, asset management, we still have work to do to rebuild the public’s trust in financial markets and their intermediaries, 10 years after the global financial crisis which eroded it.
Different firms are approaching the challenge in different ways. In the case of AllianceBernstein (AB), we have reassessed the way we do business by engaging with new market realities through the lens of our traditional focus on client needs.
This has resulted in a more diverse and innovative product offering―and more streamlined procedures―through which we can develop investment solutions that address clients’ individual needs or challenges in a flexible way over time.
Now, thanks to the Financial Services Council (FSC), our firm along with the rest of the Australian funds management industry has a real opportunity to do more in restoring the public’s trust.
Setting the Standard
In July last year, the FSC launched a new standard, “Principles of Internal Governance and Asset Stewardship”, which aims to help asset managers achieve global industry best practice in fulfilling their responsibilities to clients, whether institutions or retail investors and their advisers.
The standard became official on January 1 this year and will become mandatory for FSC full members from July 1.
It’s the first of its kind in Australia and, although inspired by similar standards overseas, goes a step further. While other codes focus on asset stewardship and conflicts of interest, the FSC standard also addresses asset managers’ internal governance.
This broader approach, and the fact that the standard was industry-driven and not imposed by regulators, is worth noting. It reflects how keenly Australian fund managers understand the importance of ethics and governance in rebuilding and maintaining trust, and how seriously they take the challenge.
The standard requires fund managers to explain their policies and practices under three broad headings―organisational and investment approach, internal governance and asset stewardship―and to share the explanations publicly.
Sensibly, given that not all fund managers are the same, the standard does not attempt to impose conformity, but takes a “comply or explain” approach. If an area of disclosure prescribed under the standard is not relevant to a manager’s business, the manager is simply required to explain why.
How will this help to rebuild trust in the investment industry?
Open to Scrutiny
Personally, I see the answer in terms of an equation: Transparency + Accountability = Trust. The first thing the standard will do is promote transparency.
By sharing on their websites information stipulated by the standard, fund managers will enable clients and prospects not only to judge their governance and other practices, but to compare them with those of other managers, too.
That increases the transparency not only of individual firms but the whole industry.
The accountability lies in the fact that, if clients and prospects are less than satisfied with the standards apparently on offer, they are free to take their business elsewhere.
Speaking of transparency, I must now make a full disclosure.
The Right Direction
Last year I was delighted to be invited to moderate a panel discussion of the new standard at the FSC’s Leaders Summit. The panellists were representatives of Wellington Management, Colonial First State Global Asset Management, the Australian Securities Exchange and Ernst & Young.
AB and the FSC have collaborated in publishing "Setting the Standard: Fund Managers Lift Their Game," an edited transcript of the debate.
I hope you read it. The panellists’ insights explain much about the background of the standard, how it evolved and how it’s likely to work.
Their comments are not only instructive but highly encouraging. While offering a realistic appraisal of what the standard can and can’t achieve, they make clear that it’s a step in the right direction to restoring public trust in our industry and helping to ensure its sustainability.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio management teams.