5.
Brand and reputation increasingly valuable
Reputations are critical in investing and are built on ethics, communications, and fiduciary responsibility. Work on brand positioning can deepen investment firms’ differentiation, but all brands are vulnerable to forces that see all finance in a negative light.
KEY POINTS
- In the Purposeful Capitalism scenario, reputation is built less on performance track record and more on trustworthiness, ethics, communication, and transparency. Investment firms could achieve better outcomes for their business and their clients if they increased attention on these areas.
- Data from The Next Generation of Trust (CFA Institute 2018) indicate that some of the most important attributes when hiring financial advisers or asset managers are soft factors. “I trust you to act in my best interest”; “you were recommended by someone I trust”; and commitment to ethical conduct top the list, alongside ability to achieve high returns.
- Corporations are increasingly vulnerable to moment-specific issues that go viral, enabled by social media. Warren Buffett said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
- Brand and reputation will draw from foundational thinking and well-socialized values and beliefs. Firms that regularly address and revisit their values and beliefs are able to differentiate themselves externally and create alignment internally.
- A firm’s reputation can be strengthened when its leadership has a bold voice on the wider issues, inspired by vision and opportunity. An example here is asset managers that make environmental, social, and governance (ESG) issues a significant element in their investment process are likely to build stronger reputations from such a stance. Generally, weak ESG ratings correspond to organizations that have weaker governance and cultural quality. Bottom-quintile ESG-rated companies have three times the idiosyncratic risk incidents (defined as abnormal stock price drawdown) that top-quintile companies have (MSCI 2017).
- Clients worldwide are increasingly using brand as a proxy for trustworthiness. In 2016, only one-third of retail investors said “a brand I can trust” was more important than “people I can count on” when choosing an investment firm, but in 2018, brand importance rose to 46%. The development of stronger brands in asset management is a work in progress. It will emanate from clear and authentic communications from trustworthy leadership. Such qualities have always been powerful but have become even more so with the growth of indexing and systematic investing, as well as solutions mandates.