CFA Institute & EdelmanInvestor Trust Study

2013

2

Methodology

AUDIENCE HOW MANY ACCURACY WHEN HOW

Retail & Institutional

Investors in the US, UK, Hong

Kong, Canada & Australia

n = 2,104 Totaln = 1,604 Retail

n= 500 Institutional

Margin of Error at the 95%

Confidence Level = ±2.1%, Total= ±2.5%, Retail

= ±4.4%, Institutional

Data Collected June

7-25, 2013

Online Survey

RESEARCH OBJECTIVE: To better understand the dimensions that shape investor perceptions of trust in

investment managers, as well as the actions that help to build trust.

3

Executive Summary

The State of Trust in the Investment Industry: Trust is fragile Overall, trust in the Investment Management industry is fragile, with half of investors trusting investment managers to do what’s right. Investors are more optimistic about the capital markets, but if trust in the industry is not bolstered, we risk damage to the capital markets as an essential societal purpose.

Trust in Practitioners & Firms: Looking beyond numbers toward aligned interestsIn todays landscape, investors are looking for more than performance and financial gains – they care about their firms’ and investment managers’ behavior. Trust that investment managers will act in their clients’ best interest is what really matters in hiring decisions. A Path Forward: Taking actionInvestment managers should always have an eye toward performance and fees, but they are now considered the baseline. Investment managers must address the concerns of investors by demonstrating commitment to ethics and aligned interests in order to build trust in the industry and capital markets at large.

4

THE STATE OF TRUST IN THE INVESTMENT INDUSTRY:TRUST IS FRAGILE

5

0.18 0.16 0.2

0.230.27

0.160.06

0.27

FINANCIAL SERVICESShown: % Trust and %Trust Great

Deal

Trust

52% 50%

61%

51%

65%

45%

33%

69%

Investors are more apt than the general population to trust the financial services industry to do what is right, but trust is still fragile

Q10. Please indicate how much you trust businesses in each of the following industries to do what is right. Please use a 9-point scale where one means that you “do not trust them at all” and nine means that you “trust them a great deal” [Top 2 Box, Trust Great Deal; Top 4 Box, Trust]

RegionInstitutional

RetailTotal0.46 0.52 0.5

0.61

FINANCIAL SERVICESShown: % Trust

• According to Edelman Trust Barometer, more informed people tend to trust more, yet total investors are only slightly more likely than the general public to trust the financial services industry.

• Not surprisingly, institutional investors, who are arguably most informed, trust the industry more so than retail investors

• Even among investors, the financial services industry is less trusted than other industries such technology, automotive and food & beverage.

6

Just half of investors trust investment management firms to do what is right, with low intensity

Q22. Now thinking about specific sectors within the financial services industry, please indicate how much you trust businesses in each of the following sectors to do what is right. Again, please use the same 9-point scale where one means that you “do not trust them at all” and nine means that you “trust them a great deal”. [Top 2 Box, Trust Great Deal; Top 4 Box, Trust]

Tota

l

Retail

Retail W

ith $

7...

Institu

tiona

l

Inve

st in

Pen

sions

US (R

etail)

UK (R

etail)

HK (R

etail)

0.15 0.13 0.180.21 0.23

0.13 0.07

0.21

INVESTMENT MANAGEMENT FIRMSShown: % Trust and %Trust Great Deal

Trust

Retail

51%53%

61% 63%

44%39%

68%Total Institution

alRegion

54%

7

Q26. To what extent do you agree or disagree with the following statement? “I have fair opportunity to profit by investing in capital markets.”

Tota

l

Retail

Retail W

ith $

750K

+

Institu

tiona

l

Inve

st in

Pen

sions

US (R

etail)

UK (R

etail)

HK (R

etail)

0.19 0.180.29 0.24 0.25 0.18 0.18 0.18

“I have fair opportunity to profit by investing in capital markets.”

Shown: % Agree and % Strongly Agree

Strongly agree

77%

81%

81%

70%

69%

74%

73%

Total Retail

71%

Institutional

Region

Yet, more than seven in ten investors agree they have fair opportunity to profit by investing in capital marketsHowever, just one in four investors strongly agrees with this statement

8

To date, investment management professionals and their firms have been most effective in enhancing investors’ trust in capital markets

Q27-31. How effective has each of the following been in enhancing your trust in the capital markets? Use a nine-point scale where one means “not at all effective” and nine means “extremely effective.” [Top 4 Box, Effective]

Investment management professionals that I deal with

Investment management firms

Regulators/legislators in my country

Investment industry associations

Regulators globally

55%

41%

38%

38%

35%

52%

39%

36%

35%

32%

63%

49%

45%

47%

43%

Past EffectivenessShown: % Effective

Institutional

Retail

Total

9

In the coming year, investors believe regulators can do the most to enhance their trust in capital markets

• Overall, 52% of investors feel regulators, either globally or locally, have the most impact on enhancing trust.

• Interestingly, the 2013 Edelman Trust Barometer cited low trust in government: just 14% trust the government to make ethical decisions.

Q32. Which of the following can do the MOST in the coming year to enhance your trust in the capital markets?

28%

13%

34%

18%

8%

Investment management professionals that I deal withInvestment management firmsRegulators/legislators in my countryRegulators globally

Total Regulators

: 52%

10

TRUST IN INDIVIDUAL PRACTIONERS & FIRMS:LOOKING BEYOND THE NUMBERS TOWARD ALIGNED INTERESTS

11

Investors rank the attribute “trusted to act in my best interest” as most important when making a decision to hire an investment manager• “Trust to act in my best interest” was cited twice as much as “ability to

achieve high returns.”• Delivering consistent returns and low fees were traditionally considered most

important in hiring an investment manager, but now these are table stakes.

Q33. Please rank each of the following attributes in order of their importance when making a decision to hire an asset or investment manager where “1” is “most important” and “6” is “least important.” [Top Box, Most important]

Trusted to act in my best interest

Ability to achieve high returns

Commitment to ethical conduct

Recommended by someone I trust

Compliance with industry best

practices

Amount/structure of fees

35%

17% 17%15%

8% 7%

Shown: % Most Important

12

A PATH FORWARD:TAKING ACTION

13

53%

52%

51%

48%

47%

33%

20%

18%

9%

ATTRIBUTESShown: % Very Important

Behavior-related attributes are more important than performance- related attributes when building investors’ trust in investment managers

Q34-43. How important is each of the following attributes to building your trust in an asset or investment manager? Please use a 9-point scale where one means that attribute is “not at all important to building your trust” and a nine means it is “extremely important to building your trust” in an asset or investment manager. [Top 2 Box, Very important]

Has transparent and open business practicesTakes responsible actions to address an issue or a

crisis

Has ethical business practices

Delivers consistent financial returns to investors

Offers high quality products or services

Has highly-regarded and widely admired top leadership

Creates programs that positively impact the local community in which the company operates

Is an innovator of new products, services or ideas

Communicates frequently and honestly on the state of its business

14

53%51%

50%48%48%

47%46%

43%43%

41%40%

38%31%

29%27%

24%17%

13%

ACTIONSShown: % Very Important

Similarly, actions related to behavior are the most important to building investors’ trust in investment managers

Q44-61. How important is each of the following actions to building your trust in an asset or investment manager? Please use a 9-point scale where one means that action is “not at all important to building your trust” and a nine means it is “extremely important to building your trust” in an asset or investment manager. [Top 2 Box, Very important]

Is transparent about both successes and failuresClearly discloses unavoidable conflicts of interest

Complies with voluntary codes of ethicsReports in simple metrics and language that I understand

Maintains independence and objectivityHas strong past performance

Has fee structures that align with my interestsOffers insights on risk management

Has staff with expert credentialsComplies with global investment performance standards

Reports on more than just returnsHas no regulatory sanctions

Shows evidence of engagement with companies in the portfolio

Communicates with me more than they need toHas low portfolio turnover

Has a strong presence in the industryHas a strong presence in traditional/print and trade media

Has a strong presence in social media channels

Investment managers should always have an

eye towards performance and fees, but they are

now considered the baseline.

Investment managers must address the

concerns of investors by demonstrating

commitment to ethics and aligned interests in order

to build trust in the industry and capital

markets at large.