One of the key buzz words in the investment management industry today is “value.” There are some who question whether investment professionals are capable of providing value anymore to clients and point to the rise of passive investment and of robo-advisers as proof that investors are increasingly disillusioned. In addition, investment thought leaders pontificate about the so-called demise of active investment management. Meanwhile, regulators have succumbed to outside pressures and are taking a more active role in our business. If we don’t reform ourselves, we can count on them to do so by enacting regulation that in some instances may be invasive, negative, disruptive and have unintended consequences.

Let’s be clear, the effects of the global financial crisis still linger today with society at large. Our image is still under intense pressure. Multibillion dollar fines and settlements involving major financial services companies continue to be levied and there continue to be negative portrayals of investment professionals in recent Hollywood blockbusters and television shows. While it is predicted that an additional 1 billion middle-class consumers will emerge globally in the next few years, representing the largest single decade increase in potential clients in history, investors still need to be convinced that investment professionals work to meet clients’ investment objectives and create positive social impact. In order to thrive, we need to better demonstrate what it means to be a professional by promoting the highest standards of education, competence, and professional conduct.

Change the debate

It is crucial to acknowledge that investors deserve an underlying investment environment that is fair and transparent and have the right to be served by professionals who act as fiduciaries to their savings. To make change happen, we must advocate for policy research and thought leadership that benefits investors and society at large.

We also must invest in developing the next generation of investment professionals. The amount of resources dedicated to training within the investment industry is low, and we’ve seen a menacing decline in standards as a result. The link between running a profitable, sustainable business and a well-trained, ethical workforce must be re-established. As a profession, we cannot skimp on our investment in developing talent if we wish to be respected and valued.

We have lost our way. Our current industry structure across the globe encourages investment professionals to sell products rather than to sell service built around the value we provide in helping investors reach their investment goals in an appropriately risk-adjusted manner. We are setting ourselves up for failure by advertising the unsustainable: quarter-over-quarter outperformance of a benchmark. This is the ultimate zero-sum game. We need to change the debate from focusing on short-term performance to focusing on investment outcomes for clients.

A more value-emphasised approach

Thinking longer-term about our industry and its future, if I had to speculate, my prediction is that the industry will divide into the following three areas:

1. Low-cost product manufacturers, where there is no size constraint on product

2. High-cost product manufacturers such as hedge funds, small cap managers, and private equity managers where there will be some capacity constraints

3. Solution providers, e.g. investment advisers who sell investment advice made up of product blocks built on the first two categories, with no size limit.

Solution providers will be well-positioned to have the upper hand, as they generally will have an open product architecture and will appeal to both institutional and retail clients. If they dedicate time to understand and value each client and their financial goals, they will be better equipped to display the benefits they offer over robo-advisers and other potentially cheaper-cost alternatives. This will not be easy. Clients are resistant to paying advisory fees. Margins may well be lower, too, but we are coming into a period where our historically high margins (buried in opaque products) will not be sustainable. So better to get in front of this trend rather than to find yourself operating a business model that has gone out of client and regulatory favour.

Does the investment industry possess the courage to make this client-centric approach work? When reflecting upon this, it’s important to ask ourselves how we can get our clients to trust us to put their needs first if we don’t expect more from ourselves. As we embark on a new year, we need to remind ourselves that a sustainable business is built upon satisfied clients and that satisfied clients are the product of a fair business model operated by thoroughly well-trained, ethical professionals.

Paul Smith is President and CEO, CFA Institute