How can the financial services industry restore the trust that has vanished from the market in the wake of four years of scandals? Leading experts from the securities industry gave their views at yesterday's plenary panel discussion.
Opening the session, Francis Remacle, the head of SWIFT's securities division, noted that "trust, confidence and integrity are key success factors in the financial services industry…how did we let them fall so low? How did we let this happen?"
The first panelist to speak was Jack Bogel, legendary founder of the Vanguard Group, the global fund management company with $720 billion under management. "The single over-riding task we all face is to restore the faith of our citizens in investing," he said. As he had done for much of his career, he stated that the key to this was to reduce the costs of the securities and fund management industry. "We do need governance reform of corporates and fund managers, but we need to make sure that investors get a fair share of the returns that their investments generate."
Bogel showed that costs have eaten up 20% of the compounded returns of the S&P500 since 1982, a time when returns averaged 14% a year. If those returns fall to 6% a year, then the costs of owning a fund go up to 57% of the total return.
"We have to reduce costs if we cannot hope to beat the market," he said. "For all you in the IT and securities processing area, lets shave costs to the lowest possible level."
By doing this, he said, it would show investors that those in the securities industry were placing their clients needs' ahead of their own, something that had not been shown for some time. "It is a business necessity now for fund management [companies] to focus on fund shareholders not their own corporate shareholders, especially in a time of reduced stock market returns," he said.
Speaking for the infrastructure providers, Jill Considine, chairman and CEO of the DTCC, again focused on reducing costs as a way of improving trust. A focus on best execution and straight through processing would drive down costs and the risks of trading, to the benefit of all. She noted that infrastructure providers built and maintained customer confidence in the reliability of their systems. "Trust is not just about honesty," she said. "It is also about capability, performance and certainty."
She showed how the DTCC had come up with the fund serve processing system in reaction to the late trading abuses of recent years, forestalling the need for excessive legislation or regulation. "Infrastructure providers can give leadership in restoring trust but in the end it's the individual's job," she said.
The practicalities of restoring trust were developed in a speech by Mitchel Lenson, the global CIO of Deutsche Bank. "Trust comes from credibility and credibility comes from delivery," he said. "That is the beginning and the end of it."
He advised the industry to focus on specific areas of improvement and deliver concrete results. "The danger for the industry is in trying to do everything at once and end up doing nothing," he said. "We need to prioritize and then actually deliver tangible results."
Rounding out the session, Joseph Antonellis, CIO of State Street asked what the IT industry can do to help restore trust. He diagnosed four important steps: IT needs to ensure business continuity and resilience; it must operate efficiently; it must focus "religiously" on compliance and transparency; and the IT industry must work together.
"We are only as strong as the weakest link in the financial services industry," he advised the delegates.