Culture is now a Red Button issue in Irish financial services, from banking to insurance through to asset management.
Recently, we have seen the setting up of the Irish Banking Culture Board to remedy cultural shortfalls in the banking sector. The Central Bank of Ireland has raised the issue of culture for asset managers repeatedly, while in the UK some of the recent failings in the fund sector (such as funds being closed for liquidity reasons) stem from the culture and practise within fund management companies and have been noted by both the UK regulator (the FCA) and the Bank of England.
To some it seems soft and ethereal, but make no mistake – culture is going to stay on the agenda for the financial services industry, and increasingly so for asset management.
What do we mean by culture? While there is a range of potential descriptions, I think at its core, at least for asset management, it is:
“how and why we do things around here”
Why does it matter? Ultimately because culture has a profound impact on the quality and sustainability of investment outcomes.
Why are regulators concerned about culture – and why should asset managers be?
Regulators rightly focus on culture as they see it as a way of mitigating the risk of poor conduct. They look for leaders to set the right tone and minimize the risk of such misconduct.
Why should asset managers care? Well of course if the regulator cares, that should be reason enough! But even more importantly, by developing good cultural traits, investment managers have the opportunity to move their business to a new level of excellence and success.
Regulators look for a healthy consumer centric culture at the heart of every investment firm, but are also clear to point out that culture is a matter for each individual entity. There is no “one size fits all” but the regulator does have a role to monitor, assess and influence. Key cultural values such as fairness, respect, integrity and honesty however would certainly feature in the Regulator’s wish-list.
In practical terms (as highlighted by the Irish and other regulators) this emerges as guidance on issues like:
Keeping fees as simple and transparent as possible
Making sure the fee is right for the product (not charging active fees for index management)
Communicating in clear non-jargon language
Clear attribution on performance and explaining benchmarks where used
Ensuring liquidity and ability to deal.
Realistic performance objectives.
Need for fund boards to challenge
It is possible to see recent issues in the UK asset management industry, where funds were forced to suspend dealing due to outflows and illiquid assets, as a cultural failure. Getting illiquid unlisted securities (which were the core of the problem) listed in lighter touch domiciles to technically continue, doesn’t seem aligned with a “consumer centric culture”. The chief of the FCA in the UK, Andrew Bailey, accused such firms of not following the “spirit” of the rules. Bailey said: “Any organisation that prioritises being within the rules rather than doing the right thing will not stand up to scrutiny”
Culture will continue to be an issue of the highest importance for regulators. How should asset managers respond?
This is in fact a great opportunity for asset managers to consider culture not just from the regulatory aspect but more for how it could drive sustainable business success, and result in a true defining competitive advantage.
A healthy culture is seen by many in the asset management industry, practitioners and observers, as a vital ingredient on long term business and outcome success. Many of the “gatekeepers” to immense amounts of pension assets globally (i.e. consultants), now explicitly downgrade asset managers who display poor cultural traits.
In fact in the UK and US, we have seen clear evidence where negative cultural characteristics such as in-fighting, bullying, dominant personalities etc. have led to poor outcomes for both firms and investors.
What does a good culture within an asset management company look like? While there will be many aspects, we should expect to see some of the following:
Honesty and transparency in customer fees – no “creaming off”
Diversity through the company and in decision-making
Reasonable and fair compensation
Good internal challenge (psychological safety)
Ability to learn from poor outcomes
Clear commitment to culture from top team
If strategy matters, then culture matters; as a poor culture will undermine and drag on a good strategy.
Asset managers should see this heightened focus on culture, not as regulatory headwinds, but as a spring-board to make that move from good to great.
Tradewinds 