Improving professional standards and trust levels in the financial services industry is something the CFA Institute based in the United States is very focused on.
Which is why the global association of investment professionals' decision to open its first regional office this week at Abu Dhabi Global Market – the organisation’s eighth international location – is significant.
It comes just weeks after the CFA released a survey that found 54 per cent of UAE investors use a financial adviser, but only 32 per cent consider them trustworthy.
This compares to 29 per cent of UAE investors who said trust must be proven at least once before they will give their adviser the benefit of the doubt.
The CFA’s mission is to advance standards, education and professionalism within the investment management industry, which it does via its Chartered Financial Analyst charter. The arduous qualification process, akin to an MBA, takes candidates up to six years to attain all three levels with only one in six of its initial applicants completing the programme. For those who pass, however, it offers credibility in an industry often blighted by mis-selling scandals.
Financial advisory firms in the UAE have been under the spotlight recently – with many facing a crisis due to dwindling trust levels and a raft of new regulations being proposed to clamp down on the mis-selling of expensive savings and investment schemes provided by insurers.
With only 460 CFA holders in this country and 3,000 in the region - compared to 153,000 globally - the CFA hopes to boost numbers and raise standards across the financial services industry.
Here, Gary Baker, the managing director for EMEA at the CFA Institute, who earned the CFA charter in 1997, reveals more:
Why has the CFA Institute opened an office at ADGM?
We are here to support the work of societies in the region and see what more we can do to help countries set up ethics and structure codes and standards for operating. We work with regulators, stock exchanges, universities and employers. Employers are keen to hire CFAs because they have a very strong financial education. Another component that is very dominant in the exam is ethics; 20 per cent of levels one, two and three is all about ethics and codes of standards. Employers like that profile – someone who is financially educated and knows how to deal with ethical dilemmas. This could be financial advisory firms, investment managers, asset managers, asset owners – so, anyone involved in the investment world.
The UAE has been blighted by poor financial advice in recent years. Do you plan to change that?
Hopefully, one of the resulting benefits is that we can help to raise standards of behaviour and standards of practice. Clearly that is part of what the CFA is, it’s about making ethical decisions a more regular part of your business life. If you are giving people tools to make decisions, you also have to help them with the context in which they are making those decisions. You can train people as well as you possibly can but ultimately it’s up to them to make a good decision and it's also up to the firms to make good decisions. You’ve got to create an ethical framework from which people can operate.
How can the CFA qualification help financial advisers make better decisions?
Everyone takes the same exam irrespective of where they are or which country, so there is a gold standard, in other words, it does not matter what local custom is, this is what we think is acceptable local practice. We are trying to develop some idea that there is a benchmark to which people should be trying to reach.
Many UAE residents do not trust financial advisers. How can trust be improved?
The more you see evidence and hear stories, the less chance that trust has to develop. It’s a very negative spiral that you see in countries but the survey also shows that if you can start to change perception, trust can improve. This region was quite low in terms of trust, Hong Kong was disastrously low but then Germany was also low. But in other areas, such as the United Kingdom you are starting to see trust levels improve. That’s partly a product of the market, as the markets have gone up, and partly regulation.
Many UAE financial advisory firms focus on product sales to secure commissions rather than advice. Is that enabling healthy decisions?
Incentive and outcomes are very often linked so being acutely aware of how incentives skew behaviour is something we talk to firms about. Are you there to manage wealth or are you there to drive transactions?
Some commentators have called this region “the wild west” of financial advice. What’s your take?
Having worked in the UK, in Asia and the US, at any point in time each of those markets has been described as some kind of Wild West and that’s a phase the industry seems to go through. At times it seems to shoot itself in its own foot pretty effectively. But you’ve got a choice; you can say, ‘Well it’s always going to be like that’ or you try and work to improve a situation and that’s why we think the CFA has a role in improving the situation. We can’t do it by ourselves, ultimately you need a regulatory framework and you need good examples that you can look towards but you have to start, otherwise you just throw your hands up and decide not to operate.
How do you start?
It’s just doing the right thing consistently. There is no magic wand; you cannot erase financial bad behaviour but you can start to influence behaviour by introducing what you regard as better-trained professionals, who are more aware of the issues facing both themselves and the companies they are operating in. You gradually piece better behaviour and a better industry together one step at a time.
Does regulation help?
Regulators can help and there is a lot of good regulation around but it’s whether it’s enforced in an effective fashion. There are examples around the world of the most impressive regulatory framework but unless you have someone putting that into place then it’s always going to struggle. Unfortunately it’s always problems and market crashes that drive regulation. You’d love to think that you don’t need a crash to drive change but that is so often the case. You have to reach a bottom before you can get effective regulation.
If holding a CFA became a standard qualification for an individual to offer advice, would that raise standards?
Well you are never going to solve human behaviour but you would have a degree of confidence that people have gone through rigorous training - that there is actual knowledge and actual application of that knowledge being made. Whether that is a CFA qualification or something else, it does not matter as long as the industry is raising its standards. The biggest thing we try to do is get people to recognise that it should be seen as a profession. It's not an industry or a transaction; if you regard offering financial advice as a profession and start to think about other professions such as doctors and accountants that have a framework of training and regular review of training and compliance, then you start to build a bit of trust. But if it’s just a collective bunch of individuals with no training, no credentials, no oversight, no regulation then it will remain a very shambolic industry.
Does that kind of benchmark exist elsewhere?
We work with authorities on what their licensing requirements are and we provide ideas of what we can contribute to a curriculum as to how they go about getting a licence to operate as a financial adviser. Some authorities will say that CFA level one is the minimum you should have to get a local licence. We would love to see that adopted in wider areas.
While UAE advisers have been criticised, global insurers that provide expensive fixed-term investment plans have also come under fire. Do they have a responsibility to provide better products?
Yes they should. The complexity in products is often the root cause of a problem. If you add on layers of complexity you are always going to lose an audience and the understanding as to what you are selling. Reducing complexity can go a long way to starting to rectify a problem. You also find that a lot of financial firms are very adept at understanding where regulatory limits are and then blending products that enable them to get around those limits. You could argue that was a large part of the great financial crash itself. It’s driving products to get round regulations rather than thinking about what this product aims to do. The types of mortgages created during that period were regulatory driven – what other purpose were they serving?
Can boosting financial literacy levels among residents also raise standards?
We can improve and train advisers but there is an onus on governments and regulators to raise financial literacy on the client’s side so they know what questions to ask and what the jargon means. If you have a totally imbalanced system, with highly professional advisers talking to people that don’t understand them, then you still have a potentially dangerous situation.