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Raising the bar on conflicts of interest in Asset Management

by Frank Caccio | May 6, 2020 | Uncategorized
managing conflicts of interest in the financial services industry

Conflicts of interest can destroy trust in an asset management firm quickly. Investor interest should always come first, and even the appearance of a conflict of interest on the manager’s part can raise concerns about transparency and trust.

As part of a compliance program, asset managers establish strict walls of separation between the investment team and operational teams. In doing so, investment decisions are made based on the strategy in place by the portfolio manager and confirmed by the risk control team. Issues such as pricing, reconciliations, and NAV calculations rightly belong outside the investment side. In situations where illiquidity or opacity make valuations difficult, the best course of action is to use a third-party to determine an objective valuation. If third-party valuations are necessary, asset managers should use them to build trust with clients by disclosing their uses and the reasons why.

The areas of conflicted interest are spread more broadly in today’s industry. Most investment managers utilize third-party vendor service for everything from human resources and investment modules, to valuation and pricing. These relationships should naturally be strong, but they should never cross the line into conflicts of interest. For instance, an executing broker who has a relationship of some kind with a trader that goes beyond the workplace can raise questions of trust. If such a situation is unavoidable from an appearance point of few, managers should periodically solicit other bids to confirm the relationship is not influencing decisions.

These types of relationships, in actuality and perception, should always be on the radar of asset managers. The staff themselves should also be legally required to disclose them to the firm for review. An arms-length agreement should be examined for potential issues, especially in areas where decision-makers can potentially benefit financially from a relationship or if the service provider is dealing in its own self-interest. As an added investor benefit, managers should routinely disclose how they handle conflicts of interest which increases trust between firm and client.

Conflict of interest can create a minefield of trouble when it exists. Whenever a new relationship is introduced into an investment process, review of all aspects of that relationship should be routinely performed. By consistently communicating the importance of disclosing these relationships and practicing by example, senior management achieve higher success through reputation, trust, and confidence for their staff and their clients.

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