05 May 2020

CFA Institute: Earning Investors Trust

The coronavirus crisis is placing severe pressures on public health, people's livelihoods, and the functioning of economies as businesses adjust to simultaneous demand and supply shocks.

The speed of developments, along with uncertainty surrounding the timeframe and the severity of the economic impact, have made it hard for investors to price assets.

As a result, markets are undergoing turbulence as prices adjust to unfolding developments, testing investors' confidence.

During this time of heightened volatility, the need for trust in the institutions and advisers that act on behalf of investors, as well as the financial system in which they operate, becomes starkly apparent.

Simply put, sound investment decision marking is predicated on trust - it is the bedrock on which financial relationships and transactions occur.

Having a trusted firm or adviser can help investors navigate through the uncertainty of this crisis and weather the economic storm.  

In a new CFA Institute study, Earning Investors Trust, we analyse the dimensions of trust at the system, industry, and firm level.

Trust is a multi-layered concept; it is dependent on information (the basis for decisions), innovation (the ability to meet investors' needs), and influence (the extent to which investors can exert control).

The study is built on a survey of 3,525 retail investors and 921 institutional investors across 15 different geographic markets.

Importantly, half of retail investors and more than two-thirds of institutional investors surveyed believed their investment firms are well prepared or very well prepared to manage through a financial crisis.

Investors with a trusted relationship with the firms and advisers that act on their behalf are much better equipped to navigate the market disruption.

At the system level, the proportion of respondents globally who expressed a high or very high level of trust in the financial services industry was 65% among institutional investors and 46% among retail investors, both of which were down slightly on 2018 levels.

However, there is a significant difference in trust levels among retail investors with and without an adviser; those with an adviser had much higher trust levels in financial services (57%) than those without an adviser (33%).

Trust levels in financial services also stand in contrast to the levels of trust among retail investors in the technology sector (60%) and in medicine (68%).

Trust is hard earned and easily lost, and it is clear that the financial industry has some way to go before it can earn the level of trust enjoyed by the medical profession.

Among institutional investors, specifically defined benefit pension plan sponsors and state or government pension sponsors, 47% of respondents thought it was likely or very likely that their fund would need to adjust benefits downwards in the next 10 years (in contrast, only 11% thought this was unlikely).

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