CFA Goes Next Step with Asset Manager Standards

The organization has joined forces with the Regulatory Compliance Association to boost asset manager compliance with its set of industry best practices.

The CFA Institute, the professional organization that oversees the Chartered Financial Analyst designation, has formed a partnership with the Regulatory Compliance Association to help asset managers comply with the CFA’s code of conduct, the group announced today. But as CFA Institute president and CEO Paul Smith explains, the development is part of a larger effort the institute has been engaged in since the financial crisis to improve the health of the investment industry.

The group’s Asset Manager Code of Conduct, a list of best practices, governs a range of issues, including portfolio manager conduct, confidentiality, and conflicts of interest. The California State Teachers’ Retirement System, Massachusetts Pension Reserves Investment Management Board, and other big institutional investors asked asset managers to voluntarily adhere to the code in part to earn back the trust of taxpayers, employees, and retirees that the pensions said had been lost since the financial crisis.

“Post ‘08, which is obviously now receding into the distance, we have struggled as an industry to convince the general public that we’re in it for them, rather than for ourselves, and that the job we do is worth paying for — or more precisely, the amount we charge is worth the value that we add,” says Smith.

As part of CFA’s venture with the compliance association, asset managers can use RCA’s transparency system to facilitate and document their compliance with the code of conduct. The importance of the code, which was published in 2009, got a boost this spring when a group of North American pension plans, including the California State Teachers’ Retirement System, Illinois Municipal Retirement Fund, Massachusetts Pension Reserves Investment Management Board, and the State Board of Administration of Florida publicly encouraged asset managers to abide by the standards.

The asset management industry is under pressure from a variety of forces, including low interest rates, which make products less appealing; competition from index funds; and regulations like the Department of Labor’s fiduciary rule, which encourages the use of less expensive products. Smith contends that active asset managers themselves are responsible for the record amounts of money that have flowed out of their products and into index funds that seek to match the performance of the overall market. Robo-advisors, or computer-based advice programs, also have also become popular as managers have insisted on continuing some practices — such as measuring the success of their funds by comparing them to generic benchmarks — that Smith argues are useless.


“Most people are self-medicating, prescribing their own remedies, reaching for things like robo-advice,” says Smith. Investors’ goals and attitudes toward risk are idiosyncratic, Smith explains, and they need professional help to reach objectives like retiring with enough money. Asset managers have made huge profits on retirement schemes but have failed to meet the goal of preparing individuals for retirement. As a result, Smith argues, the industry is inviting regulators to intervene.

Smith says traditional asset managers need to work together to come up with solutions, such as rethinking fee structures and pushing portfolio managers to invest in their own funds. Unlike hedge funds, traditional managers don’t always put money into the funds they oversee.

“I find it amazing that you can sell product A to an investor, but not invest your bonus in that fund,” Smith says.

He adds that even though hedge funds have faced heavy criticism, centered mostly on performance and fees, he admires that the best ones invest alongside clients.

“Mainstream asset managers have to demonstrate that they believe in their products,” he says. “Otherwise how will their clients believe?”