Fiduciary Finance

Fiduciary Finance

Investment Funds and the Crisis in Financial Markets

Martin Gold

This multi-faceted analysis of institutional investment defines ‘fiduciary finance’ institutions as the third pillar of the financial system, alongside banks and insurers. It documents the role played by investment funds and the money management industry during the recent financial crisis, and provides an unashamedly critical review of the business disciplines which can dominate investment practices. It clarifies the economic significance of the investment industry (circa $60 trillion in assets) and the features which differentiate fiduciary finance from traditional financial institutions such as banks and insurers.

Chapter 1: An Introduction to Fiduciary Finance

Martin Gold

Subjects: economics and finance, money and banking

Extract

INTRODUCTION The investment industry has gained prominence as many governments in developed countries have shifted responsibility to individuals to provide for their own financial security in retirement. Resource-rich and developing nations have also directed wealth receipts into financial markets to mitigate the depletion of their resources and to address intergenerational burdens arising from ageing populations. Combined, these trends have created an immense pool of professionally managed investment capital seeking returns from global financial markets. At the end of 2008, a pensions and investments survey of the world’s 500 largest money management firms estimated they were entrusted with $53.3 trillion of client funds and International Financial Services London (IFSL) estimates the global funds management market is worth $61.6 trillion,1 a figure exceeding the world’s gross domestic product (GDP) ($60.6 trillion).2 At their core, fiduciary institutions are collective investments governed to provide a specific investment proposition to consumers: they intermediate between savers in the real economy and the capital markets to achieve these economic bargains. A critically important feature of this intermediation function is that individual investment decision-making is surrendered to an independent party (usually a pension fund trustee, fund manager or financial advisor). Concomitantly, the fiduciary duties typically imposed upon promoters and managers of fiduciary products create markedly different customer–supplier relationships and attaching obligations compared to traditional financial products issued by deposit-taking institutions and insurers. The entrusting of funds in the hands of investment professionals has given rise to stakeholders’ expectations about the investment industry’s function as both...