CFA Society South Africa: Future of Finance Workshop ... · • Introduce the requirement that investment industry participants need to show how their investments impact society and

LET’S MEASURE UP IN 2019!

ACTION PLANS

CFA Society South Africa: Future of Finance Workshop

CFA Institute, under the leadership of President and CEO, Paul Smith, embarked on a multi-year research project and strategic focus under the banner of “Future of Finance”. From its statement of intent, the following:

Leveraging our global network of members, we are uniquely positioned to help shape a more trustworthy, forward-thinking investment profession that better serves society. The Future of Finance works with a distinguished advisory council and a content council of industry leaders who provide input for projects and share our ideas throughout the investment community. Our goal is to motivate and empower the world of finance to become an environment where investor interests come first, markets function at their best, and economies grow. Our Future of Finance work focuses on opportunities for change.

On 22 October 2018, CFA Society South Africa hosted a Future of Finance workshop for 50 senior industry professionals to deliberate what the desired future state for the South African finance and investment industry should look like, and what actions can be taken to move from the current status quo to the desired future state. The workshop was structured around four topics, as follows:

• The Investment Firm of the Future• The Investment Professional of the Future• The Future State of the Investment Product / Solution• The Future State of the Asset Owner

Each of the four topics were introduced by a discussion leader, followed by a round table discussion (groups of 10 people per table) to identify action items to achieve the desired outcome. The event took place under Chatham House Rule to encourage frank discussion and debate, without fear of any proposal or comment being attributed to a specific individual or firm. This document is an aggregated, summarised outcome of this industry “brainstorm” and has been structured to encourage industry participants to identify actions to which they can commit to effect change and transformation.

The next step is to organise some workgroups to translate words and ideas into action and impact. Contact us at [email protected] if you want to participate in a specific initiative and respond to the #thumamina call Let’s Measure Up in 2019!

Action item Action I can

take personallyAction I can

get my firm to takeAction that the

industry should take

Client / Investor Interests

• Shift away from benchmark-referenced performance metrics, and move towards objectives, serving clients based on their needs

• Improve relationship between clients and their assets through enhanced education and client communication

• Drive greater transparency and simplicity in client communication

• Reframe client communication to position the narrative beyond simple performance track record

• Better address the investor’s needs by starting from a position of knowing the client, and thus reduce the burden of choice

• Explicitly question what you charge clients and how it compares to your value proposition

• Drive towards personalised service and solutions to address the needs of the ultimate client; Use more fintech to assist in designing individualised investment solutions, rather than one-size- fits-all; Technology should support a “higher” touch client relationship, not engender difference

• Change prospective client engagement from selling a product to fulfilling a need; Shift from a product pusher to a solution provider

• Transform business model from commission-based to fee-based (RDR)

Education

• Introduce industry-driven education programs in schools

• Introduce regular round tables to foster collaboration on industry and economic issues

• To earn trust business needs to spend more on quality education (directly)

• Design innovative ways to encourage savings, using technology

• To build trust with investors, consultants and trustees, education is key, but education must be independent, not service provider / product focussed

• Create a Research Training Institute to capture existing expertise in the market. Create an opportunity for experienced industry incumbents to “give back”, mentor interns, skills transfer

Investment Firm Values / Culture & Corporate Citizenship / Suitable Remuneration Structures / Share Holder Activism / Board Engagement & Corporate Governance

• Require all investment firms to have stated sets of values and beliefs

• Explicitly introduce societal well-being into the firm’s mission statement

• Introduce standardised ESG Reporting Standards

• Formally incorporate ESG considerations into the overall investment process to ensure greater consistency (e.g. ESG issues)

• Encourage asset owners to vocalise their perspectives on the assets they own

• Engage companies to drive specific ESG issues, e.g. UN-PRI, King 4

Count me in toa workshopon this itemINVESTMENT FIRM OF THE FUTURE

Action I can take personally

Action I can get my firm to take

Action that the industry should take

• Invest with a conscience – identify positive trade-offs between returns and societal value, and communicate it

• Identify ways to place greater emphasis on ESG + Values that relate to the client’s needs and aspirations for a better future for all

• Identify non-performance-based measurement criteria to measure investment success

• Bring more non-financial measures of impact into the investment process and measurement

• Increase shareholder activism on companies with weak policies and boards

• Engage regulators to drive the inclusion of minimum acceptable standards in regulation and listing requirements

• Engage regulators on ways to be more pro-active and enabling, rather than reactive and obstructive

• Introduce remuneration structures that counteract short termism; that move away from performance-driven incentives

• Require that voting results on remuneration policies be binding

• Demand, and introduce, greater transparency regarding ownership structures and remuneration to increase the spotlight on the extreme inequality in South Africa. Hopefully encourage other industries in SA to follow suit

• Introduce positions on shareholder activism as part of the due diligence process

• Approach the investment decision-making process like a due diligence assessment

• Do client report-backs with no numbers, no historic data – all due diligence style, forward looking

• Ensure diversity in the investment decision making process and key decision makers

• Expand to concept of diversity beyond gender and race, e.g. cognitive diversity; skills diversity; age diversity

Employee practices

• Shift HR practices towards include non-finance degrees, reach out to other disciplines

• Assess prospective employees on culture and ethical / governance stance

• Incentivise and build employees who are empowered to build and transform communities

• Embrace employees for being more than just investment professionals – introduce flexibility for all in the workplace, not just women

Proposed workgroup: Work with CFA Institute to define global ESG reporting standards and metrics of ESG impact, specifically addressing societal needs; metrics to measure the impact of a rand invested on the SA society at large

Action Item

Action item Action I can




Professional Development

• Shift emphasis from Continuing Education (CE) to Continuous Professional Development

(CPD) that is fit-for-purpose, cognisant of what the changing environment requires

• Focus on transformative learning experiences – EQ vs IQ; moral quotient

• Encourage an increased connection to the environment – spend a % of time out of the office,

engaging with the real world – outcomes-based approach

• Study anything outside of finance – and share it with the team

• Learn new skills: forensic auditing; be a communicator / educator; be an intermediator;

director of responsible AI; be a robo-investor (especially if you are in a “traditional” firm);

critical thinking skills; cognitive behaviour bias training; governance training

• Embrace diversity pro-actively through looking for complementary skills in a set of shared values

• Strive for balance between IQ, EQ and MQ (moral quotient)

• Study impact investing

• Learn how to “kick the tyres” of companies so that you are no longer only depend on DCF

models and numbers from auditors

• Include appropriate “soft skill” psychometrics and “your big why” into job and scholarship

applications

• Practise authenticity. Discuss it. Externalise it

Count me in toa workshopon this itemINVESTMENT PROFESSIONAL OF THE FUTURE




Drive Societal Impact from the inside out

• Make corporate social investment programs related to the firm’s skills; Allocate work hours to

socially focused projects

• Use your ethical stance to spread the benefits into the corporate / firm and transform it; Create an

environment that fosters an expression of transformational values into my organisation; Influence

hiring practices that allow for selection from a broader candidate background

• Engage CFA Institute to introduce a minimum number of “CE/CPD” credits focused on societal

impact / financial inclusion initiatives

• CFA Society South Africa to introduce a system of membership dues credit for community service

Drive Societal Impact from the top down

• Recognise and reward ethical and responsible leadership

• Industry leaders to join forces (peer pressure) to stop inappropriate behaviour (e.g. short

termism, benchmark hugging, etc.) and replace it with sustainable practices and metrics,

investment time-frames / reporting that are congruent with time frames for social change & ESG

• Collaboration to determine quotas / targets that will lead to industry transformation

(gender, race, cognitive bias, age, qualification, ownership)

Client-centricity

• Shift the focus from inside (product / solution / investment process) to outside

(help clients identify goals / time frames, ask the right questions)

Ethics / Whistle-blowing

• Raise visibility of ethics training and codes of conduct to drive a personal ethical social

compact

• CFA Society SA to be a “safe space” for investment professionals to take a moral standing /

have views on social issues, if they can’t do so in their firm or fear victimisation;

share stories of real-life experiences, inside and outside the organisation

Action Item

Proposed workgroup: Establish a program to connect the investment profession to broader society to engender trust. Include some form of CE/CPD credit to recognise community-based work. Allow investment professionals to share our knowledge and educate.

Action Item Action I can take personally



Objectives

• Introduce outcomes-based solutions and present it in language that is easily understood

• Develop facility for user created (DIY) thematic product structuring

• Design indices that better suit the desired future investment environment

• Consider investment products / solutions from three perspectives: impact on me, impact on employer, impact on society

• Focus on investments that are value-led, which could be better than returns

• Apply institutional methodologies (such as LDI principles) to retail investments (e.g. in pursuit of outcomes-based solutions)

• Ensure that investments are customisable, understandable and suitable to the ultimate beneficiary, not just the client of the investment firm

• Design solutions that are fit-for-purpose for a South African market, e.g. funerals, education needs, stokvel savings, enhance financial inclusion, and less focus on global solutions – fit for SA = Simple & Accessible• Design a multi-product investment offer that crosses regulatory licenses for low-income earners. A small monthly investment that gives funeral cover / education policy / investment in a FLEXIBLE way – a flexible multi-licensed, multi-purposed single investment

• Design target-run solutions for lifestyle/bespoke solutions investing; including a defined outcome

• Combine financial products / solutions with education and financial literacy training; don’t sell products, educate clients about both the pros and the cons

• Expand financial needs analysis process to better capture lifestyle, demographics, e.g. “black tax”, non-traditional family / living arrangements, multi-generational financial needs, extended family / community-based requirements

• Encourage faster innovation within my firm, to articulate the value add to clients more clearly

• Define value metrics, shorter term that proves the value that has been delivered, giving the value that was promised

• Introduce the requirement that investment industry participants need to show how their investments impact society and move away from fixation on beating a benchmark or peers

• Collaborate as the investment industry to create products that specifically address the requirement for financial inclusion

Costs

• Use regulatory muscle to drive the standardisation of cost, e.g. TER / EAC

• Target financial fees in SA that in aggregate represent a smaller percentage of GDP

Count me in toa workshopon this itemFUTURE STATE OF THE INVESTMENT PRODUCT / SOLUTION

Action Item Action I can




• Introduce standard pricing models; industry participants can choose to comply with a specified cost structure and such compliance can be audited

• Introduce a range of multi-product solutions for the small saver, that cover variety of investment requirements, in a cost-effective way for low contributions

Underlying investments

• Consider how to introduce new / non-traditional assets into the asset allocation process

• Design and structure social impact & infrastructure projects that are packaged so that equity / bonds can be sold separately to asset managers. When projects are ready to be banked, certain returns that can be derived from it; package investments into vehicles which make them more investable; stratification into tranches with different risk profiles

• Create better / different index products to create create a more inclusive investment product; challenge index providers to provide more relevant indices

• Introduce more / a broader range of ESG-themed / compliant products, thematic investments e.g. water, climate, social impact, women

• Allocate money for impact by facilitating access to unlisted investments with identifiable societal impact, unlike listed investments where money merely moves between market participants

General

• Engage the CFA Institute to be the apolitical / objective independent party between the industry and regulators, to propose specific enabling frameworks, regulations, infrastructure required to allow industry to build products and solutions that will address societal needs, to speed up such transformative regulation – need to articulate the value add better to foster the trust

• Introduce an industry-wide centralised FICA system to reduce the cost of compliance, increase ease of access and reduce minimum required investment amounts

Proposed workgroup: Engage government to introduce further incentives that will boost a savings culture, not further indebtedness, e.g. introduce an extension or addition to the tax-free savings and investment account that allows a flexible packaged solution offering a combination of an emergency fund, funeral cover / education policy / life insurance / risk benefits / saving and investment for retirement across regulatory licenses. Design the equivalent of an

employee benefit offering for low-income earners, part-time or contract workers, self-employed individuals, people in the informal sector.

Action Item Action I can




Influence

• Influence, create demand for relevant, appropriate, required new products, incl. social impact

• As custodians, exercise fiduciary duty of holding government and institutions accountable

• Promote the requirement of simple, standardised reporting to facilitate comparative evaluation

• Demand investing in a manner that benefits the asset owner

• Encourage greater awareness of socio-economic trends and ways they can effect change

• Share success stories to highlight positive impacts from past

• Profit motive drives behaviour; need to introduce a social impact motive for advisors and asset owners to change the behaviour

• Become outspoken advocates for change

• Strive to find the right balance between acting in the best interests of clients / beneficiaries (profit motive) and investing in assets that effect social change, i.e. a social compact

• Apply moral suasion by a “soft prescribing” component in mandates premised on UN-SDG (sustainable development goals) reporting criteria

• Create a structure which will allow increased influence of the beneficiaries, e.g. allow members into proxy voting decisions

• Align the success of the (investment) firm with the successful outcome for the client – both win or both lose – builds trust• Inculcate a culture of building a partnership with clients for life – direct behaviour to long term relationships, not to maximising sales with clients that are just considered a commodity

• Demand investments with a social upliftment component – infrastructure investment in schools and hospitals etc.

• Demand increased accountability on the role of gatekeepers / consultants and their influence over trustees and asset owners

• Increase visibility of shareholder activism efforts

• Coordinate, collaborate efforts around ESG & shareholder activism

• Encourage CFA charter holders to be independent pension fund trustees and company directors

• Close the gap / reduce the distance between asset owners and the assets they own

• Standardise reporting on fees, compensation of service providers

• Collaborate on efforts to keep business / investee companies honest, stand up and stay together with others to drive governance

Count me in toa workshopon this itemFUTURE STATE OF THE ASSET OWNER




Count me in toa workshopon this item

Competency

• Close the gap / reduce the distance between asset owners and the asset manager through a job exchange program

• Pension funds must employ full time competency at the fund to have full time principal officers

• Promote the freely available CFA Investment Foundation program as capacity building training to all asset owners, trustees, everyone in the ecosystem

• Accommodate two types – more educated, more engaged and more volatile as there are more choices, or less educated, assist with fiduciary responsibility, understand consequence of choices

• The asset owner is ultimately the employee that contributes to a retirement fund but often these asset owners require basic education around needs like housing, education, medical care; the asset custodian should contribute to these social imperatives

• Invest heavily in education and training of intermediaries and clients to direct choices to successful outcomes – firms drive required behaviour not dictated by regulator

• Upskill trustees so that they can understand a broader spectrum of investments

• Introduce a financial literacy program (similar to CFA Investment Foundations) for high school learners to create a next generation of educated and informed (ultimate) asset owners

General

• Identify and get a better understanding of the asset owner – ensure that the asset owner is the manager that acts on behalf of the ultimate beneficiary

• The national trend of stand alone pension funds being consumed by umbrella funds changes the environment of asset owners – highly aggregated with less ability to differentiate between the different ultimate asset owners and their requirements

• Engage the regulator to reframe Reg. 28 to encourage more use of (unlisted) investments with a desired social impact, infrastructure development

• Less fixation on liquidity but more focus on impact

• Carefully navigate the political landscape – government and politicians are not the ultimate asset owners, citizens and ordinary member of society are

• Design a standardised due diligence template that incorporates ESG principles linked to the UN Sustainable Development Goals

Proposed workgroup: Design and implement a system to educate and facilitate exercising of minority shareholder rights (e.g. voting at listed company AGMs), including shareholding in retirement funds, collective investment schemes, etc. to enhance the ownership and accountability experience

Action Item

“The best way to predict the future is to create it.”

Abraham Lincoln

“It’s more important to do the right thing than to do things right.”

Peter F. Drucker

“If not Us, then Who? If not Now, then When?”John E. Lewis

PO Box 131 Ferndale, 2160 South AfricaTelephone: +27 11 791-0105 Fax: +27 11 791-0107

email: [email protected] Website www.cfa.ac.za

@cfasouthafrica @CFA_SA CFA Society South Africa

Documents

CFA Society South Africa: Future of Finance Workshop ... · • Introduce the requirement that investment industry participants need to show how their investments impact society and