WHAT COMES FIRST, THE MARKET OR INVESTORS?
Paul Smith is the President and Chief Executive of the Institute of Chartered Financial Analysts (CFA). Smith has over 30 years of experience in the financial industry, having headed the fund settlement unit of the Bank of Bermuda, one of the largest offshore banks in the world before HSBC acquired it in 2004. He then worked for HSBC for three years before founding his investment advisory firm. Smith became the CFA Managing Director for the Asia Pacific in 2012, and then the global head in 2015.
He is the first CFA head to visit Sri Lanka. Here are some excerpts from the interview:
How do CFA charter holders benefit a country?
The most basic way is that every country needs well-trained people, whether it is in medicine, engineering or any other service. Someone needs to give training and certification, and we do that for financial services with high ethical standards and technical competencies.
Secondly, we can also provide regulators such as the Central Bank, Colombo Stock Exchange and Securities Exchange Commission with CFA’s existing research, commission new research, help develop SMEs and contribute to forming a capital market framework. We can also help in bringing foreign institutional investors to Sri Lanka because when they see more CFA charter holders in Sri Lanka, they know who they are dealing with because the standards are the same here as they are in New York.
Charter holders can also educate the public, as CFA Sri Lanka Advocacy Chair/Director Ravi Abeysuriya is doing. Financial literacy is poor across the globe. There is a funny remark about it; ‘people care about their health advisor but not their wealth advisor’. If you are sick, you care about who treats you, because it is immediate. For many, retirement is far away, and they do not care about their wealth, but they should. The right way to build wealth is over the long term. Unfortunately, most of us are focused on daily trading and speculation; gambling effectively.
Does Sri Lanka have enough CFA charter holders to meet these needs?
Sri Lanka has around 230 charter holders. It is not bad. In America, the most developed market, there are 70,000 charter holders for a population well above ten times that of Sri Lanka. So there is a lot of growth we expect here in Sri Lanka. To get to the level of penetration seen in the US, you need 3,000 to 4,000 charter holders in Sri Lanka, but capital markets here are much smaller and less developed, so we have got a lot of headroom to develop.
How has CFA Sri Lanka helped in the country’s development narrative?
Like a lot of developing markets, it strikes you how well connected CFA members are. We have a lot of senior charter holders who know officials in the SEC, Colombo Stock Exchange, Central Bank and politicians, which is a feature of developing markets. It is very different in America where it is much harder to reach senior positions because there are many other paths in which people build their careers. In developed markets, CFA members are among the best and brightest in society, well connected, and punching above their weight.
However, more can be done. The stock market is poorly developed, and it is perhaps a political challenge, not just an industry challenge. The CFA Society has to prove to policymakers that capital markets are essential for Sri Lanka if it is to grow. If we look at the government’s ‘Vision 2025’, without a finance function that works, how are you going to attract the investments from overseas, and mobilise local savings for the infrastructure and capital market growth plans of the government? So, without a capital market policy initiative, the ’Vision 2025’ initiative is not one that will be realised.
CFA will be signing a memorandum of understanding with the Securities and Exchange Commission. What will it encompass?
There is going to be knowledge sharing about best practices, and the research CFA has already compiled. We can also help with corporate governance, compliance and new regulations.
Is poor compliance to new regulations a problem across the world?
Yes. The industry as a whole is slow to change because it is quite a well-compensated industry. The margins are quite high. When participants are publicly owned, if you scrape away the surface, their concerns are not really for their clients. Their interests are for their shareholders. So they are very defensive of their margins and very anti-change, and anti compliance for new regulations favouring the end-investor. There is a debate on what represents value for money in financial services. The European Commission feels that the pendulum is too far towards the practitioner, and not far enough towards the end-investor, i.e. the practitioner is making too much money. So, regulation results in lower margins because costs go up.
The industry’s argument is that regulation does not necessarily favour the end-investor, which may be right. However, there is no question, when you look at the industry as a whole, that the profit that we make is disproportionate to the value that we deliver. So the industry needs to think very carefully about value for money and appropriate regulations to ensure that the end-investor gets a fair result from the process. It revolves more around transparency and education of the end-investor. Is it clear what our conflicts are and what our charges are? Those are areas the industry needs to step up more.
THERE ISN’T MUCH THAT NEEDS TO BE DONE IN TERMS OF REGULATION. THE MARKETS ARE JUST TOO SMALL.
What does the world think of Sri Lanka’s capital markets and its professionals?
I think global markets see that Sri Lanka has highly educated and skilled people. When they look at the market, they see what Sri Lankans see; that the markets are thin and poorly developed. There are no investment opportunities. The reality is that it is hard to put money to work in Sri Lanka. That is part of the problem. I do not think there is much that needs to be done in terms of regulation. The markets are just too small.
There are many other venues people can take their money to. They can go to India, China and Vietnam if they are interested in Asia. There is also Latin America, Africa and Eastern Europe. So there are plenty of options if an investor wants developing market exposure. Sri Lanka needs to think about how they’re going to be attractive for that foreign investment pool by having much deeper capital markets in both fixed income and equities.
Sri Lanka needs investors to develop a robust capital market, but they will not come without one. Is it not a chicken and egg situation?
It is frustrating. When I try and unpick that, and this is a conversation we have in many markets around the world; expecting foreign money to come is a wrong way to think about the problem. What you have to develop are vibrant businesses in Sri Lanka. You need small and medium-sized enterprises in Sri Lanka that are seeking capital. Once you have that, you can build on that with financing and market avenues, and then foreign money will come.
However, to try to think you can have the prettiest stock exchange in the world without having any company to invest in, is to put the cart before the horse. So government policy has to help stimulate Sri Lankan entrepreneurs, whether in fintech, general technology or traditional manufacturing sectors so that those companies are clamouring for different loan finance and equity avenues.
Speculation is a feature in any capital market. How far can CFA members help investors navigate this?
The same way as any financial advisor, to ensure that through their expertise, they advise their client appropriately. Is the market based on fundamental considerations? Is there value to be found? Are there alternative investments? Is the market dangerous? We have a moral obligation to explain what we genuinely think of market circumstances.
In the end, it is a client’s money and if they want to speculate and we have explained to the best of our ability, then we have done our duty. The more well-trained people there are advising investors in Sri Lanka, the less likely it is that you would have speculative bubbles. Bubbles will still happen, but it is less likely for private individuals to get caught up in them. They will be more institutional bubbles.
So, that’s just a factor of average Sri Lankans having access to higher quality advice. It will help them be more considered in the way that they invest. The better the quality of professionals in your marketplace, the stronger your markets will be. The less speculative the markets will be. A paradox is that the more professionals you have, the less retail space there is and it becomes harder to outperform the market. It is relatively easy for a professional to outperform a market if there are proportionately more retail investors who are not well trained or well informed. As a market professionalises, it becomes more stable, more predictable and much harder for people to outperform as information is better shared.
OUR PROFESSIONAL CONDUCT PROGRAM IS FULLY AWARE OF WHAT GOES ON IN SRI LANKA.
What does the CFA Society do when they suspect a member of misconduct?
In Sri Lanka, we have some charter holders who are embroiled in scandals at the moment. We have a professional conduct program, and every year charter holders have to sign a conduct statement that they have upheld our standard. The cases here are still under investigation, and whether they resolve in favour of the defendant or not, I do not know. However, assuming that these gentlemen are convicted, we take their charters away from them. That, unfortunately, is all we can do. I am always passionate about publicising all things.
Not all doctors behave morally. What the public should know is that when a doctor or charter holder misbehaves, there is punishment. Nobody is perfect. We have a very low rate of imperfection in our ranks.
When we find it, we punish. Our professional conduct program is fully aware of what goes on in Sri Lanka. Even if these gentlemen are exonerated and the government cannot pursue them, it is not correct to say that we will not pursue them. Even if they have not committed a crime here, they may have violated our codes and standards.
What role can CFA members play in Sri Lanka’s ambition to become a regional financial hub?
We still come back to that chicken and egg situation of having a lovely house but no one to live in it. You need to follow a two-pronged strategy. First, you need to decide which parts of the financial markets you want to dominate in. What does Sri Lanka have as a natural advantage, which it can exploit, and be known the world over as a particular expert in that area? Then you need to bring people in and train locals to take over. That is how you get started. Then you use that opportunity to build a bridgehead into other areas of expertise over time. It is a mistake to think you can be a financial hub in every aspect of financial markets on the first day. I do not know what the government’s plans are. You’re competing against Singapore, Mumbai, Hong Kong to some extent, and Dubai, where many smart Sri Lankans are working, so bring them home.
You are the first CFA President/Chief Executive to visit Sri Lanka. How significant is that?
Well, I used to visit Sri Lanka often. I owned a house in Galle for many years, which I bought in 2001. My visit here has much more to do with using the vast social media influence I have to show what a wonderful country Sri Lanka is, to help in any way possible to recover from what happened on April 21, and of course to recognise the great job CFA Sri Lanka is doing.