Dan Richards is president of Strategic Imperatives. He is a faculty member in the MBA program at the Rotman School at the University of Toronto. He also hosts a weekly conference call called Monday Morning Jump Start, which is about strategies for financial advisors. Advisors can see it GlobeAdvisor.com. He can be reached at richards@getkeepclients.com
Trust is the critical element that makes the investment industry work - trust in the industry's knowledge, the integrity of the advice it provides and the safety of investors' money.
That's why the erosion of trust in the investment industry among Canadians is a cause for concern. This drop in trust has come through loud and clear in my conversations with investors over the last year.
The events of the past year have stretched many Canadians' trust to the breaking point - from market turmoil to Bernie Madoff to the multimillion-dollar bonuses for Goldman Sachs' investment bankers.
To help rebuild that trust, the industry should look to the example set by Warren Buffett, who has assumed newscaster Walter Cronkite's mantle as "the most trusted man in America."
The investing public's trust in Mr. Buffett comes despite his wealth. After all, normally commentary from someone worth $50-billion (U.S.) would be received with suspicion, not deference. And when General Electric looked for an outside investor to inspire confidence during the worst of last fall's economic crisis, it was Mr. Buffett it turned to.
So what are the secrets of Mr. Buffett's ability to inspire trust?
Be consistent
Steven Covey of 7 Habits fame has written that to be trusted takes both competence and character. Mr. Buffett's credibility starts with his remarkable track record. It's hard to find another manager who's matched his long-term performance of 20 per cent a year - twice the overall U.S. market.
But it's also his consistency of outlook. His ability to maintain his resolve, even in the face of periods of pronounced underperformance, is a key element in the trust he commands.
Open up
Mr. Buffett also comes across as candid, and he's willing to speak unpopular truths. He was an early critic of pay on Wall Street and derivatives, before those were widely held views. In boom markets, he's gone on record as saying that stock prices were overvalued, while during extreme downturns, like last year's, he said he was a buyer.
It's telling that few CEOs beyond Mr. Buffett are seen today as "the customer's advocate," defying conventional thinking and putting customers ahead of short-term profits.
Be clear
Central to Mr. Buffett's credibility is his self-effacing personality, apparent humility, rumpled demeanour and modest lifestyle in Omaha, Neb. He's the antithesis of the polished denizens and conspicuous consumption of Wall Street.
He also has a skill for making his points with blunt, colourful language that people can understand and relate to.
Mr. Buffett's pronouncements can stand in stark contrast to the standard investment industry bafflegab. Consider what he had to say about financial engineering: "Derivatives are financial weapons of mass destruction."
And he's not afraid to admit when he's been wrong. As he famously said after his disastrous investment in the airline industry:
"If capitalists had been present at Kitty Hawk when the Wright Brothers' plane first took off, they should have shot it down."
Align your interests
"It takes 20 years to build a reputation and five minutes to ruin it," Mr. Buffett has said, and it's something that's at the heart of building trust.
Part of building a reputation is building a history of acting ethically and doing the right thing.
One of the things that's breeding distrust at the moment is the broad perception that the investment industry adopts a "heads I win, tails you lose" approach when it comes to dealing with investors' money - no matter how investors do, the industry always seems to come out ahead.
By contrast, Mr. Buffett is noted for putting his money side by side with his investors - clear alignment of interests is key to building trust.
Regrettably, too many flavour-of-the-day investment products are still being launched because they promise easy sales and short-term profits for the investment bankers, trading and syndication desks, money managers and financial advisers involved - in fact everyone except end investors.
These products undermine trust - difficult as it might be, the industry needs to have the conviction to walk away from the easy profits and big bonuses they can offer.
The investment industry's trust problem wasn't created overnight and it won't be resolved overnight - but it does need to be addressed.
That starts by giving paramount priority to closing the trust gap. Nothing should be more important than rebuilding the trust that's been lost.
Dan Richards is president of Strategic Imperatives. He is a faculty member in the MBA program at the Rotman School at the University of Toronto. richards@getkeepclients.com
Dan Richards