By Bill Kelly, CEO, CAIA Association
Certain words in the world of sports are universally recognized and understood, even for those who have never kicked a football or swung a golf club. The 2018 FIFA World Cup Matches began this weekend and not many of us will need a definition for GOOOAAALLL. Similarly, the annual US Open Golf Championship wrapped up on Sunday and FORE could be heard echoing across the property in tony Southampton, NY. Of course, the intricacies and strategies of both sports are more complicated and cannot be summed up in a single word. Take the game of golf as one example; the rule book is well over 200 pages of self-inflicted righteousness and, interestingly, the word FORE doesn’t even get a single mention but when shouted, the need to duck or act is clear to all.
On Saturday, one of the most likeable and elite players in the golf world, who is no stranger to the aggressive shot and the accompanying FORE, brought on even more rules-based notoriety for himself. The arcane nature of the rule in question really doesn't matter, but the controversy centered around the bending of a rule well beyond its stated purpose to solely benefit this contestant. It was outrageous but legal. Rules and regulations are long on intent, but subsequent interpretations and market-driven innovations are the breeding ground for legal loopholes.
The investment management industry itself is certainly no stranger to rules and regulations either and post-GFC those tomes have gotten substantially thicker in most jurisdictions. As a general matter these rules are written by regulators and legislators to ultimately protect the end investors and to maintain fair and equitable market practices. These rule books are substantially longer and far more complicated than anything you would find in the world of sports, mostly because this is not a game, the stakes are real, and anyone can participate.
Rules and rule-benders are unfortunately highly correlated, and those same high stakes invite and maybe even incent this behavior in our industry. Is it any wonder that a recent article in the Alternative Investment Analyst Review found that the top priority among alternative investors was transparency? Rest assured, we have given them every right to be skeptical. Side letters, bilateral agreements, and rule-bending practices that we saw recently on display in Barron’s and P&I have been just some of the abetting vessels, all done within the letter of the law. Not to worry though because we have the likes of ILPA, OPERA, NCREIF, IPEV, SBAI, AIMA, MFA, etc., along with their hobby-horse fixes, none of which are universal or widely enough understood.
The financial services industry is too large, too global, and too complex to harmonize standards but perhaps we can do a better job when it comes to our conduct. The CFA Institute publishes their own Standards of Practice handbook that can be accessed via CAIA's website and maybe that is a good place to start. If you don’t have time to read the fine print, the key themes can be summed up in two simple phrases: “always put the client interests ahead of your own,” and “do the right thing when nobody is watching.”
Risk tolerance is mostly thought about in relation to investors and their goals. That definition should also include how much risk we are willing to accept amongst our fellow practitioners. Aggressive practices by nature are anti-investor and simply must not be tolerated. Whether it is the dumb grin of the “aw shucks” golfer or the behaviors of some of the most recognizable names in our industry, no one should ever tolerate edgy practices that corrode the reputation of any profession wrapping itself in unimpeachable integrity. This FORE is for you and should be taken, this time, as a call to act rather than duck.
Seek diversification, education and know your risk tolerance. Investing is for the long term.
Bill Kelly has been the CEO of the CAIA Association since 2014.