BUILDING THE INVESTMENT MANAGEMENT PROFESSION. Paul Smith, CFA President and CEO May 2017

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1 BUILDING THE INVESTMENT MANAGEMENT PROFESSION Paul Smith, CFA President and CEO May 2017

2 Leads the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. CFA Institute 2

3 GLOBAL INFLUENCE 61% 21% 18% AMERICAS EUROPE, MIDDLE EAST, AFRICA ASIA PACIFIC Members: 88,900 Members: 30,900 Members: 25,600 CFA Program Registrations: 70,300 CFA Program Registrations: 44,900 CFA Program Registrations: 108, member societies More than 140,000 members in over 150 countries Data as of 1 February 2017 CFA Institute 3

4 SOME HISTORY 4

5 70 YEARS OF CHANGE 5

A profession by definition extends a public warranty that it has established and maintains conditions of entry, standards of fair practice, disciplinary procedures, and

6 A profession by definition extends a public warranty that it has established and maintains conditions of entry, standards of fair practice, disciplinary procedures, and continuing education for its particular constituency. ~ C. Stewart Sheppard, First Executive Director, Institute of Chartered Financial Analysts (1967) 1965 Graders CFA Institute 6

7 THE PROFESSIONALISM DEBATE I want you to make all your customers and, for that matter, every investor in your territory realize that this firm has only one ambition and that is to stand for all that is best in Investment Banking. the doctor when looking after his patient should think only how he can give the best care to this patient and should not give any thought to the bill which he will send to the patient afterwards. The success of this house has been predicated upon the success of our customers if we take care of them they will take care of us. Our business will continue to grow only as we serve the best interest of the investing public. The primary point seems to be always the quality of the service and the courage to persist in giving well-considered advice, no matter how unpopular that might be sometimes. - Charles Merrill, founder, Merrill Lynch (in a 1940s internal memo to employees) - S. G. Warburg, founder, S.G. Warburg & Co, which ultimately became part of UBS (in the 1950s) 7

8 THREE QUESTIONS TODAY Our business is changing. How can we demonstrate our value to investors and earn their trust? Should increasing professionalism be a priority? What inputs can we change to create different outcomes? 8

9 VALUE, TRUST, AND PROFESSIONALISM IN TIMES OF CHANGE 9

10 Global Trends Forces of innovation and disruption specific to finance Source: Future State of the Investment Profession, April 2017 CFA Institute 10

11 SIX DRIVERS OF HISTORICAL CHANGE 1. Technological innovation 2. The spread of ideas and institutions 3. The tendency of even good political systems to degenerate 4. Demographics 5. Supplies of essential commodities 6. Climate change Source: Niall Ferguson, Laurence A. Tisch Professor of History, Harvard University 11

12 INVESTORS LACK TRUST IN US AND DON T SEE OUR VALUE KEY INDUSTRY INDICATORS: All capital raising products saw a decrease in activity in 2015 Increased market volatility TECHNOLOGY FINANCIAL SERVICES 77% 61% RETAIL 57% INSTITUTIONAL 51% GENERAL PUBLIC Uncertainty about geopolitics and globalization; rise of populism Rising interest rates MEDIA 47% Venture capital funding reached highest levels since 2000 Source: PwC Analysis Source: CFA Institute Trust to Loyalty Survey

13 A TRUST EQUATION PROFESSIONALISM CREDIBILITY License to operate Track record and experience + Competency Values TRUST & VALUE = The dependency on a service provider in a situation of risk over a prolonged period Source: Future State of the Investment Profession, April

14 WHAT MAKES A PROFESSION? Seal of approval and authority recognized by society A commitment to use knowledge for the public good, not profit maximization A common body of knowledge that is widely accepted Certification that individuals possess such knowledge before practicing A code of ethics, with compliance monitoring and enforcement Continuing professional development Is this a desirable outcome? Will we ever get there? What steps should we be taking? 14

15 THE CORE OCCUPATION INVESTMENT MANAGEMENT INDUSTRY INDUSTRY SEGMENT Portfolio Manager Research/ Investment Analysts Financial Advisors NonInvestment Management Roles Asset Mgmt & Wealth Mgmt Asset Owners Other Firms CORE INVESTMENT MANAGEMENT PROFESSIONALS (Banks, Insurance, Brokerages, Non-FS firms) How is the core changing over time? What limits to growth does the core present? What are the challenges to member societies? 15

16 CFA INSTITUTE MARKET PENETRATION BY REGION Source: Mercer Market Sizing Study 16

COLOMBUS CINCINNATI CLEVELAND DAYTON CHINA Members 456

17 COLOMBUS CINCINNATI CLEVELAND DAYTON CHINA Members ,042 CFA Candidates ,548 17

18 WHAT INPUTS CAN WE CHANGE TO CREATE DIFFERENT OUTCOMES? 18

19 The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate. - Benjamin Graham 19

20 OUTCOMES STRATEGY OUR STRATEGY & OUTCOMES Develop Future Professionals Deliver Member Value Build Market Integrity Through relevant and accessible credentialing programs. That accelerates the professional success of our members. That benefits investors and our members that serve them. High standards of entry and professionalism. Educated, ethical members at the top of their profession. Regulations that align firms and clients. Business models geared toward achieving investor outcomes. CFA Institute 20

21 EFFECTIVE BUSINESS MODELS Clearly articulated mission, strategy, resources The investment industry s fundamental role is to mobilize capital for growth and jobs, and deploy investment services for wealth creation and risk management. Aligned culture and united values between firms and their stakeholders Transparent product and fee structures oriented towards long-term goals investors first! Compensation/incentives that reflect the value clients receive Hiring practices that screen for purpose, habits, incentives, diversity Asset Manager Code CFA Institute Global Investment Performance Standards (GIPS ) Pension Trustee Code 21

CULTURE CHANGE PHI PURPOSE, HABITS, INCENTIVES Cognitive flexibility:

Doing more than expected for the overall health of the firm NEW

competitive Ownership: A feeling that you are an integral part of

22 CULTURE CHANGE PHI PURPOSE, HABITS, INCENTIVES Cognitive flexibility: Ability to adapt to disruptive forces in the industry Citizenship: Doing more than expected for the overall health of the firm NEW SKILLS NEEDED FOR SUCCESS WHAT DO THESE NEW SKILLS MEAN FOR THE CURRICULUM AND HIRING PRACTICES? Creativity: Find value in an environment that is increasingly competitive Ownership: A feeling that you are an integral part of your firm s future Source: Discovering Phi: Motivation as the Hidden Variable in Performance, 2016, CFA Institute and State Street 22

23 WOMEN AS A PERCENTAGE OF CFA INSTITUTE MEMBERS GLOBAL 18% AMER 17% APAC 24% EMEA 17% 23

24 ADVOCACY WE NEED YOUR HELP REGULATION AND POLICY Two new Standards & Advocacy Advisory Committees (US and EU) FUTURE OF FINANCE INITIATIVE A long-term effort to shape a trustworthy, forward-thinking investment profession that better serves society. - Putting investors first - Retirement security & affordability - Industry structure, content, and culture FUTURE STATE OF THE PROFESSION RESEARCH Comprehensive research to suggest the possible future state of the investment profession. CFA Institute Close collaboration with societies for greater impact Identification of actions to influence the future state for the best possible outcomes to serve the public interest. 24

25 In all affairs it's a healthy thing now and then to hang a question mark on the things you have long taken for granted. - Bertrand Russell, renowned philosopher and Nobel Laureate 25

THREE-YEAR STRATEGIC PLAN UPDATE v1

THREE-YEAR STRATEGIC PLAN UPDATE v1 FY2017-FY2019 OUR STRATEGY To develop future professionals through relevant and accessible credentialing programs 100% Member Market Penetration To deliver member value