Restoring investors' trust

Christian Charest: For Morningstar, I'm Christian Charest. Regular readers at Morningstar may have noticed that a lot of the time when we talk about portfolio managers, or even in the bios of a lot of our analysts, we mention the fact that the person is a CFA charterholder. But what exactly does that mean? I'm here today with Mr. John Bowman, the Managing Director for the Americas at the CFA Institute, to shed some light on the matter.

John, thank you very much for being here.

John Bowman: My pleasure, Christian.

Charest: To start off for our viewers who aren't too familiar with the CFA designation, can you summarize what the CFA program is?

Bowman: Sure. Well, first of all, the CFA Institute is the professional body for the global investment management profession. And we exist to attempt to build the profession and champion ethical practice and fair and efficient markets on behalf of underlying investors. Now, most people, as you said, know us because of our capstone credentialing program, our CFA program. And that is a graduate level program that has become a rite of passage to enter the industry. 135,000 individuals around the world have gone through this three-step program in order to build a foundation of understanding of investment analysis and portfolio management and, most importantly, the ethical principles and responsibilities of operating within this profession.

Charest: Let's talk a little bit about ethical standards. It's something that features prominently in your mission statement. We talk a lot about codes of ethics here at Morningstar, in the context of financial advisors. But how exactly does it apply to analysts or portfolio managers?

Bowman: Sure. As I said, we exist to serve and build and cultivate this profession. And any profession is defined by putting self-interest aside and ensuring that your sole purpose for existing is to help clients achieve their goals and their outcomes and what they are intending to accomplish for retirement or for savings. And that, unfortunately, is not typically our reputation within the investment management profession. It's something that we, as the standard bearers for the industry, are pretty disheartened about over the last decade. And so we at the CFA Institute have made it a significant priority to work with asset owners and asset managers and individual members to try to ensure that we're explaining that narrative of the importance of the investment management profession to society as a fundamental building block of connecting savers and lenders, and ensuring that clients and the public understand that we are here to serve a purpose of helping them achieve their goals.

And ethics is the core of that. Trust is the oxygen of any profession, and unfortunately, we've lost that narrative over the last 10 years since the crisis. I'm not sure those in the public square and on Main Street would agree that we are here primarily to serve their purposes. So we've got a lot of work to do to rebuild that reputation, and the CFA Institute is here to facilitate that.

Charest: Now, just to be clear, the duty of care that regulates the CFA is a fiduciary duty as opposed to a suitability duty, right?

Bowman: That's right. It's part of the CFA program and it's part of the annual professional conduct attestation that every one of those 135,000 charterholders globally sign off on. They are agreeing to abide by a code of standard that is at a fiduciary level, meaning that we put clients’ interests first above our firms in all cases. And that's something that has been in place since our origin decades ago. So we've been well ahead of a lot of the rhetoric and the debate that's been going on, certainly in Washington, here in Ontario and around the world, on what the appropriate standard of care for investors should be.

Charest: Investors don't typically interact directly with analysts or portfolio managers. How specifically would that duty of care affect individual investors?

Bowman: Right. I think many of our discussions with those managers on the institutional side, as you're describing, are one step removed from the client. In a sense, it’s an existential question of why are you here and what is your purpose for coming to work each day? I know that sounds a bit nebulous, but the point is, often our industry's public relations -- I alluded to this earlier -- focus on relative returns and beating the benchmark and quarter-over-quarter fund rankings. And I think we've lost that opportunity to ensure that we tell the story that we're here to meet an individual investor’s outcomes, and we're here to service, perhaps, a beneficiary's retirement goals and needs and payment demands and return objectives.

So I think if you're in an analyst role, if you're in a portfolio manager role, whether you're touching the client, whether you're interacting with the client, you need to ensure that that is top of mind as you approach your job each day. And that's really what charterholders are meant to do: objective research, recommendations that are specifically tailored and customized towards that specific investor that aligns with their return and risk profile and, ultimately, helps them achieve their goals.

Charest: John, thank you very much for explaining all this to us today.

Bowman: Christian, it's my pleasure.

Charest: For Morningstar, I'm Christian Charest. Thanks for watching.