Bad for the Customer, Good for the Stock Price: Wait, What?

Bill Bachrach has a business somewhat like mine, though with a specific vertical industry focus: he teaches people to become trusted professionals in the field of financial planning. I’ve read much of his material over the years and have the highest regard for what he has written (not to mention what he’s done—like the Hawaii Ironman Triathlon).

The other day, Bill found just the right words to express a paradox. Just how is it that an industry, by burning its own customers, can raise its stock price? We’ll come back to that: first, here’s Bill, from his newsletter The Trusted Financial Advisor:

The headline reads: "Wall Street wins big as Dodd drops fiduciary provision." And the first line of that article is "Chalk it up as a win for the securities and insurance industries." How do the securities and insurance industries win when the client loses? It’s a fascinating way to view the world, but not surprising.

Here’s my translation: "the lower the standards the easier it is for us to manage our advisors, salespeople, and agents." It’s the usual product-oriented, fear-based thinking from our industry at-large and it proves, once again, that you have a competitive advantage as an individual Trusted Advisor who chooses to put the client first.

Can you believe what you just read; you have a competitive advantage by putting the client first? Yes, you do. Doesn’t everyone put the client first? Apparently not. Amazingly enough, our industry considers it a win when they don’t have to adopt the highest standard of care for their clients. Wow.

Point One: There Are a Few Bad People Out There

Now, you can argue that the industry is right in its argument that the absence of a fiduciary standard is actually in the best interest of the client, but I’m with Bachrach on this one. If you disagree, I’ve got a bridge for you.

Some people think trust is naïve, that the world is a nasty place, that no one is trustworthy, and that trusting is a foolishly suicidal act.

Trust is not naïve—there is no trust without risk, for example—but it needs to be said that those people are not all wrong, not by a long shot. There are industries more rife than others with untrustworthy behavior, and the business of money, at least in recent years, is one of them.

But there’s a bigger issue that Bachrach’s indignation suggests:

Point Two: Watch Out for Profit-Justified Ethics

There are a number of researchers out there—I won’t name names, but you could research them easily—who invest quite a bit of time and energy in proving that "good" business is also good business; that you can do well by doing good. Profitability is shown to be correlated with values like transparency, social responsibility, candor, and customer focus.

I’ve studied a lot of that work, and think it is generally and fundamentally true. Doing good really does result in doing well. But—not in all cases, and not necessarily in the short run.

As Bachrach points out, you’ve got an entire industry that apparently believes they can make more money by gouging their customers than by being straight with them. Are they wrong? Put it this way: I wouldn’t even bet your money against Wall Street on this one. They are most decidedly not stupid.

Why’s this an issue? Because many of these socially-minded thinkers—whom I happen to think are basically right, and whom I support—are playing with fire when they use profitability as a justification for “good” behavior. The more you say, “the good-doing companies are actually more profitable than the evil companies,” the more you conflate the two. And the more you open it up for some companies to infer the converse and the inverse:

“It’s making the most money, so it must be the good thing,” and

“It’s not making money, so it must not be the good thing.”

And what you’ve then done is to re-define ethics in terms of profitability.

Now, there is no harm in pointing out that good deeds are usually more profitable. And none of these analysts intend to argue in favor of the perverse results. But intentions have a way of getting misinterpreted by those who have ulterior motives; those who are, oh let’s just say, bad.

It’s similar to what L.J. Rittenhouse said in a recent Trust Quotes interview, the "result of trying to replace moral standards with legal standards" is a lowering of integrity. So it is here, when we don’t guard against the turning of the ethical tables.

Just to be clear: if something is ethical, it’s usually profitable. But if it isn’t profitable, that doesn’t mean it isn’t ethical. And just because it is profitable doesn’t mean it is ethical.

There will be the more-than-occasional situation where the right thing to do is simply not the profitable thing to do. That’s when you find out who’s ethical, and who’s simply hustling their own customers.