A significant event took place and went almost unnoticed earlier this month. It was a radio programme aired across the UK which inferred something that a widely respected head of communications once told me he feared most in his role as gatekeeper of all things reputational.
In the half-hour broadcast by our venerable BBC, the UK asset management industry received its inaugural, public ‘reputation-bashing' — a humiliation we had all thought reserved for other industries. In a typically one-sided investigation, the programme zeroed in on the very thing that has vexed many of the City’s critics - what actually happens to investors' hard earned cash in the savings and investment abyss that is the asset management industry . . .
On the face of it, the argument was well versed, yet compelling; active management’s broad failure to beat the market indices to the tortuous, bewildering array of expenses within the 'value' chain, or so-called ‘intermediation’ chain. The complexity and level of intermediation, from investor, to adviser, to platform, to manager, to research analyst, to custodian, to broker was shown to be all too baffling. This was a journey with veiled charges at every step, and all too readily tolerated by either ignorant or blatantly apathetic investors.
While this may be a wake-up call at an industry level, it is all the more poignant since it is only a matter of time before we see activism at the grass-roots level, with disgruntled investors no doubt using the power of social media to make their voices heard more readily.
So where are the opportunities for asset managers to make the case as fit-and-proper custodians of people's money?
However well-meaning and necessary the steps that are being taken by the Investment Management Association to promulgate change, codes of conduct and statements of principle alone, won't cut it with investors in the short term.
The less well-known fact is that asset managers fulfill an extremely important role in society and are, arguably, best placed to influence the companies in which they invest. Managers should communicate more forcibly the tangible difference it can affect in using its skill in capital allocation to improve the underlying performance of companies. This action contributes positively to economic prosperity, through growth, the creation of jobs and tax receipts.
Managers must work together to communicate their positive role and the long-term measures they are taking to become recognised for good practice. They must provide hard evidence to support these claims and to earn recognition for the quality of their stewardship.
Perhaps there should be less emphasis on championing the out-performance of individual star funds or asset classes, and more emphasis on how an investor has actually fared at the end of the day, as well as how value has been created. Managers might also demonstrate greater empathy when communicating directly with clients any shortfalls from the expectations generated by their marketing materials. They should also be quicker to admit mistakes and take braver steps to weed out under-performing funds, as well as sub-standard portfolio managers.
Asset managers are just one component of the intermediation 'value chain' ― there are others equally as liable for the industry’s shortcomings in a complex system that has been created in the main by political, regulatory interventions over the last 25 years. But without defending itself more robustly at every level, we run the risk of others determining our fate.
Andrew Waterworth is Managing Director of Prosek Partners LLC in London
* How you pay for the City – BBC Radio 4 (broadcast on 3 Aug, 2013)