1. Professionalism and Fiduciary

Question 1

What are the four parts to the purpose of the investment industry?
1. intrinsic
2. core
3. fundamental
4. collateral

Answer 1

1. intrinsic - matching savers and spenders (those with excess capital to those needing to borrow capital)
2. core - portfolio management, ie. picking investments that will generate optimal returns over the long term, but within the constraint of acceptable risk levels
3. fundamental - increasing wealth and wellbeing of society (via greater access to capital markets for everyone)
4. collateral - creating jobs and investment firm growth

Question 2

What are the main form of value creation in the investment industry?

Answer 2

Wealth and risk management (in portfolio creation and portfolio management).

Question 3

What are three forms of value creation in the investment industry?
1. PAC
2. WRM
3. S
4. NI

Answer 3

1. providing and allocating capital (although in practice, raising capital occurs less than expected given the frequent use of cash and share buybacks to reduce the amount of equity shares outstanding)
2. wealth and risk management - main form
3. stewardship (improving societal wealth and well-being)
4. allocating capital to new investments (e.g. green energy)

Question 4

What does stewardship focus on? What is an example of what this involves?

Answer 4

Improving societal wealth and well-being.
e.g. creating a dialogue with corporate managers to promote sustainable long-term growth and to manage relevant risks.

Question 5

What is the main idea behind sustainable finance?

Answer 5

The main idea behind sustainable finance is to satisfy asset owner current needs while not jeopardizing the interests of future stakeholders.

Profit may be the main goal, but additional goals considered include improved organizational and/or societal well-being

Question 6

What is the ‘social license to operate’?

Answer 6

The investment industry operates on the basis of implied consent from society to pursue profit-oriented objectives, while at the same time improving the well-being of society and the environment

Question 7

Three key aspects of creating value within the investment industry include:
1. activities
2. evaluation
3. time horizon

Answer 7

1. Having activities to promote the wealth and well-being of stakeholders
2. Being evaluated differently (and subjectively) by various stakeholders
3. Occurring over a long time horizon so that value creation can be evaluated by analyzing the past and projecting the future

Question 8

What are the four areas of fiduciary obligations?
1. l
2. p+c
3. d
4. i

Answer 8

1. loyalty - clients come first, and no conflicts of interest
2. prudence and care - sufficient care and judgement
3. diversification (consistent with modern portfolio theory and accepted industry practice)
4. impartiality - not favoring one client above another

Question 9

Challenges of fiduciary duty:
1. application
2. evolution
3. definition
4. ESG

Answer 9

1. an exact application of each area is problematic, as there are different valid approaches (i.e. diversification)
2. definition of fiduciary duty naturally changes as investment theory and practice change over time (e.g. now ESG)
3. no universal definition of what is involved
4. with ESG in particular, this is now seen more as an opportunity to improve investment performance as opposed to just doing good

Question 10

What are the five specific values to consider within the professional mindset?
1. E+PB
2. P
3. CF
4. TIA
5. PR+CLTO

Answer 10

1. Ethical and professional behavior
2. Partnership (partner to help client achieve objectives and relationship is maintained for an extended period with candid and open discussions)
3. Client First - knowledge of clients needs, and acting with loyalty and in their best interests
4. Transparency, integrity, and accountability
5. Public responsibility and clean license to operate - implied duty to society to consider its needs in addition to those of the firm’s clients, acting right

Question 11

Three instances where the ‘right choice’ is not obvious (and examples):
1. COI (product choice)
2. BvC TO (pollution)
3. IK

Answer 11

1. conflict of interest - e.g. firm can satisfy client’s additional need with their own product - is this truly best product for the client? even if it is, might look like conflict of interest
2. benefit v cost trade off - e.g. investment will generate good returns, but cause pollution which will harm the health of the beneficiaries of the investment
3. insufficient knowledge - level of risk and return in the portfolio and returns required over different time horizons

Question 12

What is the definition of culture? (thoughts and behaviours)

Answer 12

Culture is an accumulated set of thoughts and behaviours within a specific group over the long term (a group may be a team, company, or industry)

Question 13

Culture impacts a group in the following three main ways:
1. integration of ___
2. focusing on ___
3. capitalising on ____

Answer 13

1. Integration of values and beliefs, setting expectations, creating trust
2. Focusing on the most important issues to the group
3. Capitalizing on effective communication and engagement (both internally and externally)

Question 14

Gaining a client’s trust requires the following elements:
1. C
2. C
3. P

Answer 14

1. credibility - licence, qualification, regulatory requirements, performance history
2. communication - timely and thorough
3. professionalism - deliver the service at the appropriate skill level together with loyalty, care, and prudence