Paul Smith

“Our industry is at a crossroads, largely because investors no longer see the value the industry brings to society and only meaningful change can restore that trust.”

These are the words of Paul Smith, President and CEO of the CFA Institute, who yesterday addressed the CFA Australian Investment Conference 2015 on the need for fundamental cultural change in the financial services industry.

“Australia was one of the stand outs in the global financial crisis. Its strong prudential and corporate regulatory regime ensured its financial system remained robust and fared better than most other developed nations during those difficult years following 2007 / 2008.

I commend the Australian Government, regulators and industry for having the foresight to champion such a regime; this has earned you the respect of many of your peers globally.

However, that respect is now at risk and it’s not a market event that’s threatening it. Its industry’s own internal culture; the enemy within. 2007 was a crossroads moment for financial services in many countries; 2015 is that cross roads for Australian financial services.

“Industry reform is a community issue, particularly here in Australia where nearly every person is an investor through mandated superannuation and change must happen if the health of the financial system as a whole is to be maintained,” Mr Smith said.

CFA has a three point action plan to regain investor trust by building a sustainable investment profession. It is designed to ensure its principles are reflected in the way financial services businesses are run by:

1. Setting high standards of entry into the profession and demonstrate the highest levels of professionalism
2. Creating business models geared towards achieving investor outcomes
3. Advocating for regulations that align firms and clients

“We are asking our 147 global members and 120,000 investment professionals worldwide to endorse these principles and work to actively implement them within their businesses.”

Mr Smith went on to say that CFA in Australia and New Zealand had taken these principles a step further by also developing an ethical model in response to the question “where do we want to be as an industry?”
“We call this our ‘ethical map’, a whole-of-enterprise cultural change management process that is a road map to building strong culture based on world class standards of ethics, market integrity and technical excellence.“

“We wanted our industry to be regarded by the community as highly competent guardians of their money and trusted champions for their rights. All investors have a right to expect two things from the industry which serves them: an instilled sense of ethics and market integrity, in other words, compliance; and high standards of technical excellence, or competence.”

“We also wanted to be acknowledged by regulators as a profession whose culture is largely self-governing, serving the best interests of the community. CFA Institute is already regarded as a highly respected source of knowledge in the global financial community and a trusted adviser to governments and regulators around the world on industry issues. Our comprehensive standards and programs have been adopted by industry globally and now is the right opportunity to share these tools in Australia.”

“Last, but not least, we wanted this region to continue to be globally respected as a centre of excellence in financial services practice and talent. We have nearly 2,500 charterholders in Australia, including some of the most reputable members of the financial services industry. We aim to partner with like-minded peers who want to build and sustain a culture in Australia that delivers this future for our local industry.”

“The industry must now work together to bring this best-practice model to life,” Mr Smith said.

In conclusion, Mr Smith said that now is a crucial time for financial services in Australia.

“Culture is the issue; change is the solution and the path before you clear. All that remains is for Australia to choose to stay at the forefront and to protect the very precious reputation it worked so hard to build. Not choosing to change is no longer an option.”

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Recognised as a leading platform for thought leadership in investment and finance, this year’s theme of ‘Going Back to Fundamentals’ highlights the forces that are changing investment markets forever, and asks how investors can identify successful investment strategies in today’s low-growth, volatile global economy.

According to Paul Smith, CFA, president and CEO, CFA Institute, the lineup of international and local speakers are all influential leaders and specialists in their field.

“Delegates will hear from experts across the investment and finance market spectrum including research houses, investment managers and ethics specialists, as well as from Greg Medcraft, Chairman of the Australian Securities & Investments Commission (ASIC); Philip Lowe, Deputy Governor of the Reserve Bank of Australia (RBA); and David Murray, AO, former CEO of the Commonwealth Bank, Chair of the Financial System Inquiry and now Senior Adviser at Credit Suisse.”

“The opportunity to benefit from their experience and insights will be invaluable,” he said.

Mr Smith will himself address the crucial theme of professionalism and in particular how to build a better investment profession. Drawing on his thirty years’ experience in investment and business management in Asia and the United States, he will talk about the need for a robust ethical framework.

“As a profession, we need to be able to better demonstrate to the world at large that we are committed to the highest standards of education, technical competence and professional conduct if we are to engender the essential ingredient we need to succeed, and that is trust,” he said. “CFA Institute has a multi-decade track record in setting global benchmarks for market integrity and ethics; we aim to use that expertise to partner with our industry around the world and in Australia to ensure that ‘best of breed’ practice is instilled as a way of working and on behalf of the community.”

In other presentations, issues as diverse as climate change, evolving demographics and the battle between increasing regulatory requirements and the demand for higher standards of ethics will be addressed, along with the likely repercussions on market movements and demand for investment products.

Philip Lowe, Deputy Governor of the RBA, will talk about Australia’s economic fundamentals, including the importance of flexibility. Investment specialists from Invesco, First State Super, Goldman Sachs and BT Investment Management, among others, will give their views on the state of the industry now, highlight future trends and debate whether or not financial bubbles are in fact a necessary evil.

Mr Smith concluded by saying that any investment professional had the opportunity to stay ahead of the game by educating themselves on developments in investment management and by hearing experts’ views on the future of the industry at the Conference.

“The low-growth, volatile global economy is proving challenging for investment professionals everywhere, so understanding how best to respond to the changing landscape, and to adapt traditional thinking to develop forward-looking investment strategies will be crucial for success,” he said.

Please visit CFA Societies Australia’s ‘Australian Investment Conference 2015’ for more information or to register for the event.

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Smith’s appointment comes after an extensive global search to lead the organization of more 127,000 investment professionals in 147 countries, most of whom are CFA charterholders.

Smith has more than 30 years of leadership experience in the asset management industry, including over 18 years in Asia. He joined Bank of Bermuda in Hong Kong as Asia head of securities services in 1996. After HSBC’s acquisition of the bank in 2004, he served as global head of securities services and global head of alternative funds administration based in New York, where he was responsible for the delivery of services to 2,000 investment funds with over US$250 billion of assets. Before joining CFA Institute in October 2012, Smith was chairman and CEO of Asia Alternative Asset Partners.

With extensive management and business experience at global organizations, Smith will continue to support CFA Institute efforts to champion for ethical behavior in investment markets as a respected source of knowledge in the global financial community.

“It’s a critical moment for both investors and the professionals who serve them. In his time with CFA Institute, Paul has demonstrated the bold vision and strong leadership we need to advance the profession and shape a more trustworthy financial industry,” said Aaron Low, CFA, chair of the CFA Institute Board of Governors. “Paul has made a significant contribution to the investment industry, and CFA Institute is well-positioned for continued growth and leadership under his direction.”

The selection comes as CFA Institute continues to broaden its global reach, with a stronger presence planned for both China and India, continued growth of its recently launched Claritas Investment Certificate program, an Annual Conference in April in Frankfurt, Germany, and the second annual Putting Investors First Month in May – a global series of events to unite financial professionals throughout the world in a commitment to place investor interests above all others.

“Above all, CFA Institute was searching for a solid understanding of the value of our education programs, and how the CFA charter, our codes and standards, and advocacy efforts contribute to the advancement of our mission,” said Smith. “Having served CFA Institute from within I am fully aware of its rich history and contribution to the global investment profession, and I look forward to leading the organization in pursuit of our end goal, to advance the investment profession for the ultimate benefit of society.”

Smith is a Fellow of the Institute of Chartered Accountants of England and Wales and an Executive Committee member of the Alternative Investment Association, Hong Kong. He holds a Masters degree in History from Oxford University, and is a CFA charterholder.

Smith succeeds the leadership of Dwight D. Churchill, CFA, who was named interim president and CEO in June of last year following the tenure of former president and CEO John Rogers, CFA.

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Gap between perception and behaviour of planners: CFA study

A study released yesterday by the Economist Intelligence Unit and sponsored by CFA Institute has shown that although financial services executives overwhelmingly recognise the importance of ethical behaviour in the industry, there is still a significant gap between that belief and the industry’s practices. The study, A Crisis of Culture: Valuing Ethics and Knowledge in Financial Services, shows that strengthening culture based around driving integrity and financial knowledge across firms is a priority for the financial services industry.

Despite the importance placed on creating a stronger ethical culture since the financial crisis, a serious disparity still exists when it comes to executives’ recognition that adhering to those higher standards will help earn trust, foster career progress and support financial performance. Although 91% of survey respondents placed equal importance on ethical behaviour and financial success, more than half (53%) think career progression at their firm would be difficult without being “flexible” on ethical standards, and just 37% believe that their firm’s financials would improve if the ethical conduct of employees improved.

The study also looked at the critical issue of knowledge in the industry. Whilst 97% of respondents said that they are well qualified for their own role, 62% admit that their colleagues know very little about what goes on in departments beyond their own. This shows that a silo culture is pervasive in the industry, with departments acting unilaterally rather than viewing themselves as part of the wider business, suggesting integrated functional and management approaches to risk-proof organisations remains weak.

Paul Smith, Asia Pacific Managing Director of CFA Institute, commented:

“CFA Institute sponsored this study in order to take the temperature of the financial services industry as we begin to emerge from the financial crisis. The results show that the industry has further to go on its journey to drive up ethical standards and embrace professional education. It also shows signs of a shift in culture by recognizing the benefits of global ethical standards and industry knowledge, and addressing agency issues. If we are to move the industry forward it is incumbent upon everyone within the industry to align their personal and organizational values with those that serve client, shareholder and societal needs. Aspiring to adopt these values will create more resilient firms and a stronger future for finance.”

Statistical Highlights:

Ethics

• 91% of financial executives support the notion that aspiring to a globally recognised set of ethical standards would make the financial services industry more resilient
• 67% of firms have raised awareness of the importance of ethical conduct by all employees
• 53% of financial services executives say strictly adhering to ethical standards inhibits career progression at their firm

Financial Knowledge

• 62% of financial executives don’t know what is going on outside their department
• 61% of financial executives highlight gaps in employees’ knowledge as a significant risk for their firm
• 59% of financial executives agree improving knowledge of the industry as a whole would help make their firm more resilient
• 12% say they are confident in their knowledge of the global regulatory environment

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“We are not that surprised that our exposure to a price on carbon is so low. Australian Ethical avoids coal and uranium mining and other industries that are unnecessarily harmful to the environment. However, we know that, like all taxes, it would be hard to completely avoid all carbon-intensive companies.

“The smart players concluded long ago that a price on carbon was inevitable. However, our stock selection process has not changed in any way as the carbon legislation nears, so it is good to see that our approach of only investing in stocks that are positively impacting society is working well,” said Paul Smith, General Manager, Strategy & Communications at Australian Ethical. 

The four stocks in Australian Ethical’s portfolios are:

• DBNGP
• Energy Developments
• Envestra
• Snowy Hydro                     

Australian Ethical expects that over 250 companies will fall under the carbon legislation in the next financial year.

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