Nick Pollard, was in Mumbai last week attending CFA Society India’s 8th India Investment Conference. CFA institute is an association of experienced investment professionals who comply to a standard of professional education and ethics by completing relevant academic programmes conducted by the institute. Pollard has worked extensively in the financial services industry—specifically in banking, wealth management and talent development—before taking on this role with CFA Institute in 2016. He spoke to us about the global investment scenario, the prevalent risks and how the industry in India looks when we see the transformative stage that investment management regulations are in today. Edited excerpts:
With increased liquidity in global markets we have witnessed an increasing comfort in remaining with risk assets. Has the bar been raised in terms of return expectations from assets like equities, commodities and high yield debt?
Since the global financial crisis, I have noticed that people are more vary of taking growth for granted. Different parts of the world face different challenges. Where I come from, investors will still look for return before they talk about risk. On the other hand, say in the UK, I suspect it would be the other way around. Expectations are starting to get bigger and as an industry to be able to respond to that, there is a need for transparency and knowledge about what’s really happening underneath. This is not to dampen enthusiasm but to articulate the dynamics of the investment management industry better rather than simply taking instructions (from clients).
As an industry (investment management), we are better at talking about the good news than the bad news. To instil trust in clients, one has to talk about good and bad.
How much do the widely discussed geo-political risks in the global arena impact growth-oriented investors?
At the CFA Conference, Richard Koo, the chief economist for Nomura is talking about geo political risks as we speak. He just mentioned, for instance, during the great depression in the US, its GDP was reduced by 45% in 4 years. This is extraordinary for any economy and was catastrophic for the US. One assumes this could happen again given what’s going on. There is political unrest, there are extraordinary popularist Presidential candidates not just in the US but in other parts of the world too, driving economic decision making.
Part of our job is to try and make sense of it. As an institute we are more on the academic, educational framework. The research we have done through our members on what kind of skill sets will be important in the future tells us that the ability to have a conversation and make sense of the nonsensical world, ability to be transparent and make informed decisions are the key. It is about getting to know the individual, trying to fit what they need rather than talking about products. Risk management is an important skill set now, part of it has to deal with geo political risks today. People have different levels of understanding, but everyday we read a Trump tweet and that can potentially change the market. So, one of the skill sets of this job and certainly our focus from a continuous professional development perspective, its about making sense of the wider financial world from the point of view of an individual’s portfolio.
There is a lot of conversation about various risks and high valuations in some asset classes. However, the market is still optimistic, why do you think that is so?
It is almost impossible to find a report on India (this year) which is not super bullish about what’s going on. If you break down the performance dynamics, there is a very young dynamic population, you’ve got super growth across asset classes, policy reforms which add to the attractiveness of doing business and a willingness from a governmental perspective. I’m not the right person to ring the bell and say this is going to end on a particular date. It is again about understanding that markets don’t last forever and trying to find those parts of the market that have more sustainable growth, doing your research properly and being absolutely honest about what you are trying to achieve. What I have found during my lifetime as an investment management professional is that most clients will come to you with some fairly fixed ideas about what they are looking to do. You can either support them or challenge them. Lot of the effort that we put into the continuous professional development module is about improving interpersonal skills and have some challenging conversations. The norm should be not to take anything for granted.
There is a constant debate around asset management fees. How much is too much? What is an ideal balance for asset managers to make money and not over charge? Is performance-linked fee a solution?
I think it has to be an option. Historically, fees have been hidden. You didn’t know whether you were paying for research. The level of commissions being paid in a bundled approach have almost obfuscated how that works. Consequently, when people actually started asking the right kind of questions—in some parts of the world like Europe; this has determined a different approach towards transparency. This has a global impact. I have worked in private banking where customers are always okay to pay for performance. The argument from the corporate side has been that this is not a risk business, so we make money and lose money together. Customers should know what they are paying for. Having options is important.
We shouldn’t talk about fees without looking at passive and active (investing) and also fintech and its impact on the way fee structures will evolve. In Singapore, there is conflict with 104 private wealth management firms and less than five of them being profitable. I think its because from a compliance, technology and cost perspective compared to fees, things are moving in the opposite direction.
Our CFA mantra is all about transparency. We are not recommending one format over another. We are just saying that the customers you have, need to know exactly what they are paying for.
In India we are also trying to fine tune the role of distributors and advisers, with a push to remove overlaps. Advisers may not find it remunerative enough to serve the smallest investors, whereas distributors may be giving good advice. Are there markets (globally) where advice only is pervasive to all clients?
The answer is at the heart of the fintech revolution. From a commercial perspective, in my view the economics of a human adviser for investors with lower levels of wealth becomes harder and harder to justify. But I do think that fintech has, to some extent, democratized access to advice. It wasn’t that many years ago when, if you had a small amount to invest, nobody would be interested in you as a customer. Now you can go online. There is no minimum entry level in terms of advice you can get. I think these two models can sit side by side.
In terms of human advisers, there will be more focus on large and high net-worth investors because that is likely to be commercially more sustainable. I think that’s ok. I see more benefit than downside in terms of the overall impact on wealth management industry.
While regulation in India and in the developed world is evolving to a point where the clients’ interest is prioritised, what we see less of is penal action against distributors and advisers who are mis-selling, especially in an individual capacity. There is not much by way of deterrence. Why is that?
There are several issues related to this. First, regulators may see issues differently. So, the level of consistency may be lacking in resolving it. Second, being a little parochial for a moment, if a CFA charter holder operated in a manner that was against the code of conduct related to regulations in a market, we have a very detailed professional conduct approach. The ultimate sanction for us would be that they would lose their ability to carry the CFA charter. That may not be a financial fine but it is in this day and age if you are marketing your competence through a qualification, and you lose that, your ability to compete reduces.
I have seen different approaches from different regulators. I suspect in many ways the publicity that goes with amuck behaviour is something that regulators do think about when deciding the penalty to impose. I think it would be a mistake to think that companies aren’t taking this seriously. The increased investment in compliance, greater awareness of reputational risk impacting balance sheet value in my experience will matter in a customer service oriented business.
Some segments of the industry have been critical of the Indian capital markets regulator, saying it may be too quick in imposing some regulations, as the financialisation of savings in the country is at a nascent stage. Your views on this.
An interesting comparison would be with China. Maybe again if I relate it to the CFA Institute. One of the great challenges there is not increasing the number of candidates, it is finding roles for them to do once they are qualified. In China the industry is growing at the same pace. In India the industry is growing at a slower pace and I would say that is deliberate Government policy as it helps to manage the risks with a more conservative approach. Both have merits and downsides. The downside here in India would be that the industry could grow faster if it had less handcuffs. Having said that, there is a comfort level to the speed at which it is growing.
China is growing very quickly, at a municipal basis and the national basis. The doomsayers will point out that there will be a problem some day and people who have their glasses full will be able to take market share.
Yes, there is more regulation in India than some other parts of the market (globally). But I do understand, specially in terms of the young and to some extent inexperienced population—some modicum of control and conservatism behind the growth of the industry could be a sensible thing.
First Published: Fri, Jan 19 2018. 05 23 PM IST