BUILDING THE INVESTMENTMANAGEMENT PROFESSIONPaul Smith, CFAPresident and CEOMay 2017

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Leads the investment profession globally by promoting the highest standards of ethics,

education, and professional excellence for the ultimate benefit of society.

CFA Institute

GLOBAL INFLUENCE

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148 member societies

More than 140,000 members in over 150 countries

AMERICAS

Members: 88,900

CFA Program Registrations: 70,300

61%

EUROPE, MIDDLE EAST, AFRICA

Members: 30,900

CFA Program Registrations: 44,900

21%

ASIA PACIFIC

Members: 25,600

CFA Program Registrations: 108,300

18%

Data as of 1 February 2017

CFA Institute

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SOME HISTORY

70 YEARS OF CHANGE

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A profession by definition “extends a public warranty that it has established and maintains conditions of entry, standards of fair practice, disciplinary procedures, and continuing education for its particular constituency.”~ C. Stewart Sheppard, First Executive Director, Institute of Chartered Financial Analysts (1967)

1965 Graders

CFA Institute

THE PROFESSIONALISM DEBATE

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“I want you to make all your customers and, for that matter, every investor in your territory realize that this firm has only one ambition—and that is to stand for all that is best in Investment Banking.

The success of this house has been predicated upon the success of our customers—if we take care of them they will take care of us. Our business will continue to grow only as we serve the best interest of the investing public.”

- Charles Merrill, founder, Merrill Lynch (in a 1940s internal memo to employees)

“…the doctor when looking after his patient should think only how he can give the best care to this patient and should not give any thought to the bill which he will send to the patient afterwards.

The primary point seems to be always the quality of the service and the courage to persist in giving well-considered advice, no matter how unpopular that might be sometimes.”

- S. G. Warburg, founder, S.G. Warburg & Co, which ultimately became part of UBS (in the 1950s)

THREE QUESTIONS TODAY

• Our business is changing. How can we demonstrate our value to investors and earn their trust?

• Should increasing professionalism be a priority?

• What inputs can we change to create different outcomes?

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VALUE, TRUST, AND PROFESSIONALISMIN TIMES OF CHANGE

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Forces of innovationand disruptionspecific to finance

Source: Future State of the Investment Profession, April 2017

Global Trends

CFA Institute

SIX DRIVERS OF HISTORICAL CHANGE

1. Technological innovation

2. The spread of ideas and institutions

3. The tendency of even good political systems to degenerate

4. Demographics

5. Supplies of essential commodities

6. Climate change

Source: Niall Ferguson, Laurence A. Tisch Professor of History, Harvard University

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INVESTORS LACK TRUST IN US AND DON’T SEE OUR VALUE

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KEY INDUSTRY INDICATORS:

• All capital raising products saw a decrease in activity in 2015

• Increased market volatility

• Uncertainty about geopolitics and globalization; rise of populism

• Rising interest rates

• Venture capital funding reached highest levels since 2000

Source: PwC Analysis

77%

61%RETAIL

47%

57%INSTITU-TIONAL

51%GENERAL

PUBLIC

TECHNOLOGY

FINANCIALSERVICES

MEDIA

Source: CFA Institute Trust to Loyalty Survey 2016

A TRUST EQUATION

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=

TRUST & VALUECREDIBILITY PROFESSIONALISM

+ The dependency on aservice provider in a situation of risk over a prolonged period

License to operate

Track record andexperience

Competency

Values

Source: Future State of the Investment Profession, April 2017

WHAT MAKES A PROFESSION?

• Seal of approval and authority recognized by society

• A commitment to use knowledge for the public good, not profit maximization

A common body of knowledge that is widely accepted

Certification that individuals possess such knowledge before practicing

A code of ethics, with compliance monitoring and enforcement

• Continuing professional development

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Is this a desirable outcome?Will we ever get there?What steps should we be taking?

THE CORE

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OCCUPATION

INDUSTRY SEGMENT

Portfolio Manager

Research/Investment Analysts

Financial Advisors

Non-Investment Management Roles

Asset Mgmt & Wealth Mgmt

CORE INVESTMENT MANAGEMENT

PROFESSIONALS

Asset Owners

Other Firms (Banks, Insurance, Brokerages, Non-FS firms)

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How is the core changing over time?What limits to growth does the core present?What are the challenges to member societies?

CFA INSTITUTE MARKET PENETRATIONBY REGION

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Source: Mercer Market Sizing Study

COLOMBUS CINCINNATI CLEVELAND DAYTON CHINA

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Members 456 467 444 58 4,042

CFA Candidates 398 276 441 103 58,548

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WHAT INPUTS CAN WE CHANGE TO CREATE DIFFERENT OUTCOMES?

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“The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.”

- Benjamin Graham

OUR STRATEGY & OUTCOMES

High standards of entry and professionalism.

Educated, ethical members at the top of their profession.

Regulations that align firms and clients.

Develop Future Professionals

Through relevant and accessible credentialing programs.

Deliver Member Value

That accelerates the professional success of our members.

Build Market Integrity

That benefits investors and our members that serve them.

Business models geared toward achieving investor outcomes.

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The investment industry’s

fundamental role is to mobilize

capital for growth and jobs, and

deploy investment services

for wealth creation and

risk management.

EFFECTIVE BUSINESS MODELS

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Asset Manager Code Global Investment PerformanceStandards (GIPS®)

Pension Trustee Code

Clearly articulated mission, strategy, resources

Transparent product and fee structures oriented towards long-term goals– investors first!

Compensation/incentives that reflectthe value clients receive

Hiring practices that screen for purpose, habits, incentives, diversity

Aligned culture and united values between firms and their stakeholders

CFA Institute

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Source: Discovering Phi: Motivation as the Hidden Variable in Performance, 2016, CFA Institute and State Street

Ownership: A feeling that you are an integral part of your firm’s future

Cognitive flexibility: Ability to adapt to disruptive forces in the industry

Creativity: Find value inan environment that is increasingly competitive

Citizenship: Doing more than expected for the overall health of the firm

NEW SKILLS

NEEDED FOR

SUCCESS

WHAT DO THESE NEW SKILLS MEAN

FOR THECURRICULUM AND HIRING PRACTICES?

CULTURE CHANGEPHI – PURPOSE, HABITS, INCENTIVES

WOMEN AS A PERCENTAGE OF CFA INSTITUTE MEMBERS

GLOBAL 18%

AMER 17%

APAC 24%

EMEA 17%

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ADVOCACY – WE NEED YOUR HELP

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REGULATION ANDPOLICY

FUTURE OF FINANCEINITIATIVE

FUTURE STATE OF THE PROFESSION RESEARCH

Two new Standards & Advocacy Advisory Committees (US and EU)

Close collaboration with societies for greater impact

A long-term effort to shape a trustworthy, forward-thinking investment profession that better serves society. - Putting investors first- Retirement security & affordability- Industry structure, content, and culture

Comprehensive research to suggest the possible future state of the investment profession.

Identification of actions to influence the future state for the best possible outcomes to serve the public interest.

CFA Institute

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“In all affairs it's a healthy thing now and then to hang a question mark on the things you have long taken for granted.”

- Bertrand Russell, renowned philosopher and Nobel Laureate