(light music) – The last six words
in our mission, which I’m passionate about are, for the ultimate
benefit of society, and really that’s what we’re
trying to connect finance and investment management
to, is a sense of purpose. (light music) – Hello, I’m Magalie
Laguerre-Wilkinson. Welcome to Ethics in
Business: In Their Own Words. To celebrate the Fifth
Annual Global Ethics Day in October 2018, ACCA, the Association of Chartered
Certified Accountants has teamed up with Carnegie
Council and CFA Institute to produce this
interview series. It features global
business leaders exploring how businesses are
preparing for an ethical future in the face of
threats and challenges presented by globalization, technology, and
human psychology. Today we are talking
to Paul Smith, President and CEO
of CFA Institute. CFA Institute is the
global association for investment
management professionals with over 150,000 members and 151 local member
societies worldwide. Its mission is to lead the
investment profession globally by promoting the highest
standards of ethics, education, and
professional excellence. CFA Institute
believes it’s vital that those in financial services maintain high
ethical principles, which are essential to
protecting investors, functioning markets,
and growing economies. What role does CFA Institute
play in the community? – I guess we have two
roles, one as an employer. We have offices from
Charlottesville in Virginia, which is our headquarters,
through to Beijing in China. We obviously have
a responsibility as far as that is concerned
to be a diverse employer and an employer who thinks
about its carbon footprint and the way we impact
the environment in and around our offices. On a wider context, we have
something like 163,000 members around the world
in 165 countries, and we also have 320,000
candidates as well, so 500,000 people in our
ecosystem, if you like, in many, many countries, and our responsibility there
is to provide education that helps them be
thoughtful citizens of the planet we all inhabit. – So it seems as though the
CFA Institute’s tentacles are a little bit everywhere. What are some specific
philanthropic efforts that CFA Institute
is undertaking? – I think the biggest one
that we’re doing at the moment is around women in
investment management. So the impact there,
it was a project that was started in
India, in fact in Mumbai, where we’ve taken 49 young
women, originally it was 50, but one young lady dropped
out of the program, 49 young women who didn’t have
access to financial education and didn’t have the
aspiration really to think that their
professional careers could take them into finance, and we put them
through something that we rather inelegantly
call a boot camp, which is a four to five
week training program. And then working with
industry partners, we got each of them a
six-month internship with an asset management
company in India, which was also paid so
that was very important, we don’t believe in
abusing young people in terms of unpaid internships,
and put them through that. That’s been a huge success,
and as a result of that the G7 under Canada’s
current leadership have noticed that program
and are working with us to fund that in up to nine
other countries around the world over the next three years. So that for me is perhaps one of the most important
contributions that we’re making, trying to contribute to
the cognitive diversity, if you like, within the
investment profession. – So Canada has picked
up on your model? – Yes it has. – Explain the
concept of the model. – Well the concept
of the model is that young women often,
for various reasons, don’t think about
finance as a career. Obviously, in the
Western world perhaps they’ve seen “Billions” or
“The Wolf of Wall Street” or something like that, and it’s bizarrely not something that they necessarily wish
to put themselves through. And our challenge as
investment professionals is to explain that that really
isn’t an accurate picture of the way that our world works. And I think the
second, deeper reason is that we have really
failed as an industry to talk about the
purpose of what we do. I think too many young
women think of it as very, A, a male-dominated,
which is true, but B, a very selfish profession that’s focused solely on
enriching the participants within the profession. And what we have done
a very poor job of is explaining that actually
investment management is quite a noble
profession, that without us, particularly in the
developing world, where it’s easier to see,
roads don’t get built, hospitals don’t get built,
schools don’t get built, people aren’t able to
plan for retirement, and our profession has
done a lousy job really of trying to put that
forward to young people to attract them
into the profession. And as a result, we have a very ethnically
un-diverse profession and also a very poorly
diverse profession from a background perspective, everyone tends to have
gone to the elite schools in whatever country
they’re from, tend to be male, tend
to be very middle class. The result of that is that
we lack cognitive diversity to help us solve
some of the problems that we have in the world and to help us relate
better to our clients. – And this seems to be a
trend that you’re seeing, and how do you
mainstream it more, then? – Well that’s a great question, and obviously it’s a challenge. The first thing we’ve got to do is to convince the profession
that this is a problem. So it’s a bit like turkeys
voting for Thanksgiving or in my country we
would say Christmas. It’s a challenge to convince a bunch of middle-aged,
middle-class white
men particularly that they should try to open
things up a little bit more, so that’s the first challenge. I think in a wider context, talking about cognitive
diversity is not such a problem, but getting into
universities and high schools and convincing young women
obviously is a huge task, and we’re trying to do that, and we’re very active
in that regard, we have some 500
universities around the world that we work closely with,
but that’s the battle, and it’s not going
to be won overnight. It’s a generational activity, and it’s largely a
hearts-and-minds campaign, and obviously that’s
gonna take a long while. – How are you managing your
impact on the environment? – Right, well we’re really
at the start of our journey as far as that’s concerned. We’re quite good as far as
our buildings are concerned. So internally, we are very
thoughtful about that. We travel too much,
and I am unfortunately the worst example of that, so we’re trying to figure
that out at the moment and we’ve done a
carbon footprint study
of the organization. So we’ve gone that far
and now we’re trying to actually figure out, well
what are we going to do with that information? So we’re at I
would say level one on a three-to-four-stage process of trying to improve our
own internal footprint, and there are lots of things that we’ve got to think
about within that. We have quite a large
endowment, how’s that managed, and is that being
thoughtfully done? But more importantly,
again coming back to what I was saying earlier on, we have this 500,000
group of individuals, and that really
through our curriculum and through continuing
professional
development activities, trying to get through
to that larger audience that they also have
a responsibility
alongside of ourselves is part of the battle. – You touched on
this a little bit in one of your answers
just a little bit ago, but I wanna ask you
again to focus a bit on how does CFA Institute work to create diversity in
the investment industry? – Well it’s a
country-by-country conversation. So diversity as a
specific challenge tends to be more focused
on the Western world, so countries like my own
in the UK and in the EU and here in America
and Canada as well, where we are trying to reach
out to minority communities and talk about what we’re doing. So we have scholarship programs that are targeted toward
some minority communities to try to encourage
them into our education. But more importantly, we’re
just trying to win the battle on saying that a more
diverse profession will serve a diverse
client base better, and also a more
diverse thought process will inevitably result in
better investment solutions for a complicated world. There’s lots of academic
research around that, to prove that out. There’s lots of
academic research around how diverse
investment teams will produce better results than non-diverse
investment teams, because as I said earlier
it’s not something today that the vast majority of
investment professionals will agree with,
and depressingly, it’s not something that
the majority of female CFAs agree with either, so
that’s interesting. – That is interesting. We’ve seen in the tech
industry, for instance, STEM programs starting
in high school and even middle schools. How does CFA Institute
plan on implementing something like that
in the younger ages to get girls and minorities
and other groups interested? – Well we have something
called Investment Foundations, which is a junior program, which is very
definitely, it’s free, and it’s geared toward high
schools and middle schools to help kids get the start in
terms of financial education, so that’s there. Our challenge is that
this isn’t in the main, some states are
different in the U.S., but in the main it’s not
part of the curriculum. So the biggest challenge has
been talking to school boards about saying that
financial literacy, to give it a more populist term, is something that should
really be thought about within the educational
curriculum, and that, alas, is not a winning
battle at the moment. So most of the activities
that we have as an institute are philanthropic, to use the
term that you used earlier, where a lot of our groups
of CFAs around the nation, which we call CFA Societies, and we have about 80
of those in the U.S. in the various cities
around the country, they actually have
their own initiatives. The challenge with
that is that each one, as you kind of said, sort of picks a
different piece of this. Some might look at it from a disadvantaged
community perspective, some might look at it
middle school issues, some might look at
it as young adults, people who have already
left the school system who are discounting
payday checks and things of that nature and how can we give
practical support to families where often no one’s had a
bank account, for instance, and just on that level
trying to help young people understand the banking
system, credit card debt, how to manage their weekly
finances, is a big effort. But that’s philanthropic as
opposed to baked in the cake. – It sounds like the
spectrum is very broad of what CFA Institute does. – Yes, you used the term, I
hope we’re a benign octopus, something with these
tentacles everywhere, we’re a cuddly octopus, if that’s not a
contradiction in terms. But yeah, and we take
that, our mission, the last six words
in our mission, which I’m passionate about are, for the ultimate
benefit of society, is that there is a
point to what we do. And the point to what we do is
to help everybody in society fulfill their
financial aspirations. Again, coming back to
something I said earlier, and I get laughed
at for saying it, that’s actually
quite a noble cause, and we should be
proud of ourselves, and we should talk more
forcefully about it, that we are well-motivated and a key part of how
society functions. – How does CFA Institute
help investment professionals and firms adapt to
technological change? – Right, well through
the curriculum again. Financial technology
is a key part of our profession nowadays. A lot of outside
commentators will say that the financial profession is about to have its Uber moment or however one describes that, and I think to a certain
extent it’s true. Whether it’s on asset
management techniques or product construction
and distribution, technology is revolutionizing
our profession, and for the better
because it is helping us be more transparent,
more consistent, and more scalable
so clients will get a hugely improved service as a result of
financial technology. It’ll be cheaper for them,
they’ll understand it more, it’ll be more accessible,
more consistent, and better reported to them. So for me, it’s the best thing that’s happened
to our profession because it’s taking away
decades of mumbo jumbo that we have confused
the general public with, and that’s one of
the reasons why I think we have this challenge
of connecting to purpose because we’ve overcomplicated what is a very simple business. – We’re talking, of course,
in honor of Global Ethics Day. I want you to tell me
about the role of ethics as being core to
professionalizing the
investment industry. – Well ethics
firstly is the core of everything that we teach. So 10% of our program is
based on ethical teaching, which is based on something that we call our
code of conduct. So every charter holder, everyone who’s got the three
letters after their name, CFA, has to annually
sign an attestation that they have lived
their professional life in accordance with
our code of conduct at all times during
the previous 12 months. So that’s a great statement as far as the
public is concerned that a charter holder
is ethically committed. What does that mean? Well in essence, ethics is putting yourself
in your clients’ shoes. It’s no more
complicated than that. If you’re dealing with me
as a financial professional, your job as a financial
professional is to say, If I were on the other
side of the table, would I be happy with the way that I’m being dealt with? Nothing more than that. And when you think about
what a professional is, I always like to torture
the medical profession as my analogy, and I know people can
beat up on doctors a lot, but basically when you
sit in front of a doctor you believe that she
or he is advising you in your best interests, and that’s what we
have to establish in the minds of our clients when they’re sitting in front
of their financial advisor. And today alas, I
think most people sitting in front of their
financial advisor will say well because it will
invariably be a male, what’s his angle? And until we can get
over that barrier and make people,
make our clients feel that we are really looking at
things from their perspective, then we can’t really
truly call ourselves either a profession or an
ethical profession, either. And so that’s the essence of it, put yourself in
your clients’ shoes and do as you would be done by. – How has the
investment world evolved throughout your career,
what changes have you seen? – Well that’s a long
question, I’m very old, so it goes back into
the early 1980s, and so when I started out, when I think back
to the early 1980s, the first one I would say is that the composition
of the industry in terms of its educational
background has changed hugely. I did modern history
at university, didn’t do a finance degree, it was only when I came
down from university I went and became an accountant and then into asset management. And I would say
people of my vintage, who are obviously
well into their 50s, anyone over the age of 50,
50 to 60 percent of them had a liberal arts background. When Big Bang happened
in the City of London and its attendant
events here in the U.S., around the late
80s to early 90s, the industry changed into being a very technically driven one, computerized
trading, screen-based
investment management, all of those things. And so we went to kids who
really were educated in business and finance and
had econ degrees. And anyone under the age of 50, I would say 90% of them
have that background. So the challenge has been that
we have driven this industry down an ever narrower
pipe in my view in terms of its human
content, as it were, it’s a rather
inelegant expression, but I hope you know what I mean, and I think the change
that we’re now coming into under financial technology is that we’re gonna have to
broaden it back out again. Because if you think
about the challenges that FinTech will bring us, how do we take this
very technical content and explain it to people? And that’s going to
be more something that people who’ve
got softer skills are going to be able to do. So that’s one element to it, and I think that technical focus has also divorced us from
our clients a little bit. It’s compounded this
challenge that we have of being unable to explain what we do to people
in simple terms because people who have a
very technical background are not necessarily the best
communicators in the world. That’s obviously an
awful generalization, but I think it has some force. – It definitely has
merit, for sure. So what you’re saying
is that it can’t be a one size fits all
type of training. Definitely not. And I think the world as we
know it is getting more complicated, not less. Everybody’s looking for
this unicorn, really, which is someone
who’s a data scientist, a quantatative mathematician
who can also talk to people. Yeah. That’s going to be
a struggle and a stretch. Is CFA Institute using
behavioral finance and other tools to prepare
people for retirement and how to live
on a fixed income? – Our job is not necessarily
to educate the end investor, it’s to educate
the professional. But yes, indirectly behavioral
finance is a key tool and something that is ever
more present in our curriculum and in the thinking of
financial advisors everywhere. How do we help nudge
people effectively toward the behaviors
that are best suited to their personal circumstances? So yes, behavioral economics
is a key piece of it, and something that’s
been very exciting over the last ten
years to see how that has really become
part of the mainstream. But retirement I
think is fascinating. You’re too young, but my
children are about to have, I’m about to be a grandfather at some point in the
next three or four years, which I’m very excited about,
and you think about that, my grandkids are gonna live to
110 on average, God willing. And you think about
retirement in that sense, and it becomes a very
complicated conversation. You’re certainly not
going to be retiring at 60 and having 50 years being
paid for by the state or by your own savings, so the whole concept of
retirement scheme planning I think has to be
rethought in the context of a world in which
people are going to live such very, very long lives. And that I don’t think
society has started to grapple with really, is re-imagining what
life is gonna be like for a generation of people who are gonna live
into their hundreds. – That’s frightening. – Yeah it’s not a world
that you necessarily feel that you want to
live in yourself, but it is one that’s coming. So the retirement
scheme crisis for me divides into two parts,
one is the short-term one, that as we all know,
particularly in
the United States, that most of our retirement
schemes are bust, are bankrupt, and that’s a result of
a lack of political will and often state-level
politicians playing fast and loose
with funding rates as far as state pension
plans are concerned. But that’s been talked
about endlessly, and there’s not much
that we can add there. What we’re trying
to do is to say, well part of it is training, and that we can do
something about, so how can we act on pension
fund trustee training? We’ve got some programs
that are geared towards that that we’re trying to focus on. But then there’s a
second question which is, well what is life
gonna look like in 60 or 70 years’ time? My kids are all in
their 20s and 30s, my youngest son is 26. And you go to a
26-year-old and you say, in a zero interest
rate environment son, you’ve got to save 20
percent of your salary for your retirement,
and which by the way, your retirement is age
75, it’s not anytime soon. And they look at you and
they say, well thanks Dad, but that’s really the
most useless advice I think I’ve ever received. Firstly, I spend every
penny of my salary, so there’s no way
I can save 20%, and I look at 75-year-olds, and they’re not having
much fun frankly, so why am I saving for that, I’d rather spend the money
now, go on a holiday, and have fun while I can. And when you look
at it that way, you can’t argue with that, that’s a perfectly sensible, rational actually,
set of decisions. Our retirement scheme
system is predicated upon behaviors that the
Millennial generation simply does not have, so it’s
not a recipe for success. – What is the greatest
ethical challenge facing CFA Institute and the investment
profession in general? – I think the one
that it’s always been, that our profession
deals with money, and there’s an awful lot
of it in the profession. And we also have this challenge
that there’s this huge, what we call in our jargon,
asymmetry of information, because as an
investment professional you know far more
than your client does because financial
literacy levels in general is a subject that
turns people off, they’re not really focused. It’s not like your
health, for instance, when something goes
wrong with your health, you’re absolutely focused on it, you’re on the internet,
you’re worried, you’re trying to
figure out what to do. Your wealth is
something that people just sort of push away
from them all the time. So professionals have
this huge advantage over their clients, and so that’s the
biggest ethical challenge that there’s money involved,
a lot of money involved, and your client isn’t engaged, and so your scope for misusing
that advantage is enormous. – That’s also not very ethical. – No, obviously, and so
that’s where ethics come in, which is, put yourself
in your clients’ shoes, and are you offering
them product that is appropriate for
them, is it properly priced? Are you continuing
to advise them throughout the relationship
that you have with them? Do they understand? Have you worked hard enough to really get inside their head and figure out what it is that
they want from their wealth? Those are the challenges that a professional
needs to rise to, always with at the
back of their mind the understanding that
you have this opportunity for abusing that position because your client often
isn’t really engaged in that conversation in the way that would protect them
from the unscrupulous. – Is it a combination
of a lack of interest or a lack of understanding? – Well I think it’s
both of those things. And I always say, and sorry, you have to forgive me
for torturing doctors, I think when you go to a doctor you’re going for a
problem that by and large she or he is going to cure
within three to six months. So they’ve got a very
immediate value proposition as far as you’re concerned, and you can tell
whether a doctor is or isn’t up to their task. With a financial professional, I might be advising someone
who’s say, 30 years of age, on their wealth, their
retirement planning for 30 years hence
or 40 years hence, and so my value proposition
is hugely extended. And so as a result of that, people are able to have almost a do-it-yourself culture that, well is that financial advisor
really adding value to me, I can’t see it in
the here and now, I may as well do it myself,
and so we have that challenge. So there’s a greater
responsibility to explain it
better, and that’s where I think
we are so hopeless, that we just are not
connecting with our clients around how important it is
that they get proper advice for their wealth. Because you know you need two
things to live a happy life, and you can be as
healthy as you like, but if you’re as poor
as a church mouse, then it’s unlikely that
you’re going to be as happy as you could be. (upbeat music) (upbeat music)