Five Questions: John Rogers of the CFA Institute

President of financial analyst institute says economy will suffer unless and until public trust in Wall Street is restored.

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It’s no secret that the financial industry has lost the public’s faith in its integrity. And John Rogers, president of the CFA Institute, thinks that loss represents much more than a public relations problem. In fact, Rogers insists that the economy will suffer unless and until faith in the industry is restored. The good news is that he believes that’s possible so long as investors accept their responsibility for helping restore that faith. With that in mind, the institute, which this year is celebrating the 50th anniversary of its program for certifying analysts, recently published a list of steps the investment community should take, entitled “The Integrity List: 50 Ways to Restore Trust in the Investment Industry.” Institutional Investor Executive Editor Ronald Fink recently sat down with Rogers to discuss what the most important steps entail.

1. Why hasn’t public trust in Wall Street been restored given all the regulatory efforts that have been undertaken?

It’s ironic, isn’t it, that we’ve had general recoveries in terms of the equity and bond markets. Even property prices appear to be bottoming out. But the indicators that we look at around public trust in financial services suggest that the level of trust continues to decline and is at extremely low levels.

2. What accounts for that?

The news flow has been extremely unsettling. Just when we think we’ve reached the end, we get another financial firm embroiled in the headlines. Regulation can only go so far. We all understand what needs to be done there. But actually making that happen, particularly in the very divisive environment that we have here now, takes longer.

3. But as you say, the markets have rallied. What’s the problem?

It’s about getting the wheels of the economy moving again. But everyday people get scared out of the market, so we see the system slowing down. And it’s observable through spreads in the marketplace, which are very wide, despite the rise of the algos, which are rapidly taking over the equity markets. But when you get into nonliquid assets, the spreads are extremely wide. It’s a very inefficient system.

4. What role should investors play in restoring public trust?

There are enormous opportunities at the firm level for boards and management teams to talk about creating more sustainable cultures and models. Some of the firms that were viewed as dinosaurs just a few years ago, mutually owned insurance companies, credit unions, investment management companies, that offer mutual funds where the owners of the funds are also the owners of the company — the largest example would be Vanguard — have found renewed success.

If you’re a firm that wants to come to market, you’ve got tough decisions to make now in terms of how do you do that. Do you go with a big, integrated universal bank on an exchange? Or do you use another model? If enough investors see alternatives that I think more clearly align their interests, then I think investors will move in that direction. And this has really been one of the major problems. It’s a conflict of interest where financial firms and financial players put their own interests ahead of the interest of their clients. And people are just sick and tired of it.

5. It sounds as if you’re saying that the shareholder model doesn’t work very well for a fiduciary-based business model.

I wouldn’t want to go that far. I think, though, that the shareholder model that focuses on anything that’s short term and needs to focus on leverage in order to generate the types of returns that shareholders want or are conditioned to want appears to have some problems. And the market has voted in that direction, with the large banks trading at half of their tangible asset values. So I would say there are opportunities to redefine what shareholders should expect from financial companies.

Nobody ever said that finance has a right to exist. We operate under a social contract. And if we, as finance professionals, don’t right the ship, clean it up, get it sailing straight, then we’ll lose that. And that’s critical.

John Rogers Ronald Fink financial analyst institute Wall Street CFA Institute
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