Part 2: Why Aren’t There High Trust Strategies in a Low Trust Industry?

The Financial Trust PuzzleIn my last post, I asked the question: If financial services are such a low-trust industry (on average), then why isn’t someone pursuing the obvious differentiation strategy of forming a high-trust organization?

The Reasons Why

I offered five possible reasons, and commenters added two more.  They were:

  1. Wait – some companies really are high-trust.
  2. The nature of the business is highly competitive – you can’t be high trust and stay in business.
  3. The industry is full of untrustworthy, greedy, anti-consumer people.
  4. The industry is so over-regulated that trust never has a chance to get traction.
  5. The media have a bias that will sink most attempts at high-trust organizations.
  6. Greedy shareholders force companies to be untrustworthy.
  7. The industry simply does not understand the nature of trust

Here’s my take on the issue. Please weigh in with your comments, below.

1. Some really are high trust. I’ve seen many parts of organizations – business units of 100 people or so – who absolutely do run high-trust businesses. But I’ve seen very few  who have pulled it off at the corporate level (one I know of first-hand is Bangor Savings Bank). I’m sure there are others, but I’m equally sure they’re the exception, not the rule.

There’s a reason the industry is low-trust – most financial companies simply are not trusted. The data are what they are and they’re not wrong.

2. The industry is so competitive that you can’t afford to be trustworthy. I’m totally not buying this. The financial industry may appear to be “competitive,” but it is also loaded with side deals, barriers to competition, and generally anti-competitive practices. Furthermore, some extraordinarily high-trust salespeople and business units, e.g. in wealth management, are that way precisely because they are high trust. Economics 101: competitive industries are marked by low profits, not high.  The financial industry is very – very – high profit.

3. The industry is full of untrustworthy people. I’m with reader Ronald on this one – the big majority of people I know in the financial industry are not untrustworthy, selfish, dishonorable people. Sure there are Madoffs, but there are in other industries too.  The problem is that good people can get enmeshed in bad endeavors. A whole lot of unethical corporate behavior isn’t due to lax moral standards, it’s due to habits, incentives, and organizational pressure.

4. The industry is over-regulated. There is more than a grain of truth here. If you are constantly investigated and given lie detector tests, eventually you’re very likely to decide that someone’s stealing and lying, and maybe you should try and get your piece of the pie. Conflating ethical behavior with legal behavior, or check-boxes with values, is death to ethics. We can have too much regulation – at the cost of moral behavior.

5. The media done it. Is there a systematic bias against financial industries on the part of media, mainstream or otherwise? I think you can make a case that a great number of media outlets are finely tuned to seek wrongdoing from the financial sector.  But not enough of a case. If Big Finance is so powerful as to control congress, evade prosecution, and continue to collect massive bonuses – then why wouldn’t they have the power to better control their own branding? I can’t disprove it, but let’s just say I’m skeptical of conspiracy theories.

6. Greedy shareholders are to blame. There’s a lot of truth here too. The emphasis on quarterly earnings, and particularly the massive bonuses given to fund managers based on short-term performance all drive up the emphasis on profit.  (Oddly, the short-term emphasis actually reduces the profit which would be available by pursuing long-term trust-based strategies). But this explanation is as valid for high tech as it is for finance, and the tech people constantly score better trust ratings.  I’m not convinced.

And the Oscar Goes To…

7. The industry just doesn’t understand trust. Yes, you guessed it, this is my nomination for best explanation. Here’s what I mean.

First, money may be the most emotional product imaginable. The dreams that can be conjured up by perfume are trivial next to those induced by a big MegaBucks lottery. A financial planner tells me that clients would sooner talk about their sex lives than their financial lives. Money has implications for our status, our future, our children; it’s a nearly pure-emotion product.

And yet the financial industry insists on selling money services on a non-emotional basis. Credentials and qualifications are what financial planners and wealth managers lead with. Fee-only planners insist that because they’re not commissioned they are structurally more trustworthy. Bankers are fond of touting product features. About as far as emotion goes in the financial industry is to invoke symbols like the Rock of Gibraltar, or ads featuring smiling retirees who are moonlighting from pharmaceutical spots.

What you get by promoting the Merrill Barney brand, or the Smith Lynch brand, and the credentials of their employees is weak, thin trust – trust that’s getting weaker and thinner with new media and smarter consumers. Rich trust comes from personal interactions, with individuals who aren’t afraid to get personal. Emotional products call for emotional connection in the sale. Financial people are scared to death to get personal.

Second, financial institutions tend to think that trust is mainly institutional – they can’t grasp that trust at its heart is dyadic, about two people. They worry about their professionals “stealing clients” when they leave – as if the clients were property of the institution – which amounts to devaluing the key interpersonal relationships that can develop between professionals and customers.

Third, financial institutions too often try to have it both ways: they want to appear trustworthy so that clients will trust them – but they rarely turn around and trust their customers. If someone constantly asks you to trust them, but never trusts you, then trust is rather quickly lost. Is your local bank branch empowered to make a spot decision to trust you? Unlikely. And don’t tell me no-doc mortgages were an exception – those were driven not by trust, but by greed on the part of the lenders, suborning falsehoods from customers.

Fourth, no other industry I know of forces profitability analyses to such a detailed level. Not only is the timeframe for analysis very short-term, but decisions are made based on highly quantified, narrowly defined analyses. What happens if we give people a 5-day grace period – if we lose money, forget it. What happens if we tweak the eligibility standards here – if we lose money, forget it.  To some extent, this is because the product of finance is money itself – subjecting money to financial analysis is both obvious and necessary. But it does mean there is very little emphasis put on long-term returns, or balancing offsets. Sponsoring golf tournaments is about as long-term and qualitative as it gets, and I bet every company doing it has some details specs on why it’s profitable.

Finally, as noted in point 4 above, an industry which is tightly regulated can tend to lose track of the distinction between compliance and ethics. “I am not a crook” ends up being the defense against ethical complaints, and that doesn’t do the job.

So there’s my case: I think the main reason the financial industry gets such low rankings on trust is because they simply, fundamentally, do not understand the workings of trust.

Their people are neither stupid nor venal. But the cumulative impact of putting rational over emotional needs, processes over interactions, short-term over long, regulations over ethics, is such that financial organizations simply don’t have much of a clue when it comes to implementing trust.

Too many trust initiatives end up focused on customer satisfaction methodologies, CRM systems, PR and messaging campaigns, and trumpeting credentials. Rarely do they get to the heart of trust – the personal connection between a provider and a customer.

Remember who was number 1? Nurses. Just think about the difference between finance and nursing. Our financial companies could learn a lot by studying how nurses create trust.

The Insurance Industry Is Getting the Shirley Sherrod Treatment

In early July, the news industry and a number of politicians and government officials grossly over-reacted to an out of context news-bit in the case of Shirley Sherrod. The blowback was justified, and swift.

On July 28, it happened again. The news industry and a number of politicians grossly over-reacted to another out of context news-bit. This time it was death benefits’ insurance payments. The blowback is equally justified–but is nowhere to be found.

The reason is simple: Shirley Sherrod was a good woman maligned, and all it took was a few more minutes of video to prove it to anyone’s satisfaction.

By contrast, the insurance industry has no face to connect with the public, and their reputation is hardly warm and fuzzy. 

But since when should the reputation of the victim be allowed to justify bad behavior on the part of the press and the government?

The lessons should be the same. The reputation of the victim shouldn’t justify different treatment by press and politicians. The orgy of bombastic claims, the piling on of politicians and media alike are just as ugly and threatening to a free society as they were in the Sherrod case. 

Distortion and uncritical use of reports are an abuse of trust, regardless of target, and regardless of your politics. 

How the Press and Government are Reprising the Shirley Sherrod Mistake

It started with Bloomberg Markets Magazine on July 28. The headline was Duping the Families of Fallen Soldiers. That headline suggests a fraud; it suggests a particular class of victim; and it suggests an emotion-laden issue (fallen soldiers and greedy financiers).

The first paragraph then continues this three-part theme of fraud, victims and outrage:

"Life insurers are secretly profiting from death benefits owed to the survivors of service members and other Americans."  

The story then goes on to tell the sad story of the mother of a soldier killed in Afghanistan, who received a package, including what she thought was a checkbook, and who didn’t notice a disclaimer in the explanation. She was then “shocked” to find out her money wasn’t in an FDIC-insured bank.

Before I list everything wrong with this opening, let’s look at how politicians reacted:

The House of Representatives introduced a bill to set new rules for life insurance companies holding death benefits from policies of military…

Andrew Cuomo began an investigation, saying

“It is shocking and plain wrong for these multinational life insurance companies to pocket hundreds of millions in profits that really belong to those who have lost family members,”

The Department of Veterans Affairs says it will begin an investigation;

Defense Secretary Gates pledged help to assist the VA’s investigation;

“It’s disgusting, particularly in the case of dead soldiers, for insurance companies to be holding back” money from survivors, said Robert Hunter, Director of Insurance for the Consumer Federation of America.

“… insurance companies…profiting inappropriately from these service members’ sacrifice is completely unacceptable,” [said] Mike Walcoff, acting undersecretary for the VA’s Veterans Benefit Administration.

Senator Chuck Schumer says:

"It’s deeply troubling that insurance companies would promote these accounts as if they were run-of-the-mill checking accounts, yet the insurance companies profit from the interest, and provide no FDIC guarantee that the money itself is insured."

House Veterans Affairs Committee Chairman Bob Filner said he was “outraged."

The New York State Insurance Department pledged a review.

Even White House spokesman Nick Shapiro said President Obama “supports the VA’s immediate investigation" into the "unacceptable" practices.

What about the press?

Unlike the Sherrod case, where the left wing media gleefully jumped on Fox News, here they grabbed their own pitchforks. Mother Jones talked about Wall Street’s Dead Soldier Problem, calling it a scam.

Mainstream media? Here’s the CBS evening news preview: “A Fallen Hero: How an Insurance Company Profited.

"The consensus is in: there is massive fraud being committed by major insurance companies; the victims are the bereaved families of our fallen military heroes; and the ill-gotten gains, as well as the damages, are massive.

And what’s John Q. Public to believe? You can sample the blogs and letters to the editor yourself, but here’s a typical one:

"Prudential is literally making money off dead soldiers. That’s sick. Seriously, have they no shame? Is there anything lower than that?"

 The only problem is—as it was with Sherrod—the headlines are far from the real truth. Very far.

The Real Truth: It’s Not about the Soldiers

The Bloomberg story, reported by David Evans, was headlined Duping the Families of Fallen Soldiers, and as I said the lead paragraph continued the theme. But the article itself contained hints of how wrong that was.

First, the practice in question is called “retained-asset accounts.” As the article itself says,

“retained-asset accounts have become standard operating procedure in an industry that touches virtually every American: There are more than 300 million active life insurance policies in the U.S.”

The article goes on to identify three firms that collectively manage over a million retained asset accounts. 

Now do the math. About 2.5 million people die annually in the US. There are somewhere over 1 million retained asset accounts. And the number of US troops killed in Afghanistan and Iraq since those two wars began is about 4,300. 

Contrary to what the article suggests—and regardless of what you think about our wars—the retained asset account story has almost nothing to do with soldiers. They look to account for somewhere under 5% of total policies.

Of course, “fallen soldiers” is just about as emotionally loaded as “reverse racism,” the concept that underlay the Shirley Sherrod debacle. And it worked just as well on knee-jerk politicians and journalists. But it’s not the whole story.

The Real Truth: It’s Not a Scam

As the insurance commissioner of the State of Connecticut says, “[this] practice has been in place for at least twenty years, with 0 complaints or problems reported in Connecticut.”

Two life insurance analysts at FBR Capital Markets say:

"Accounts that life insurers offer to set up for beneficiaries are a long-established product feature that is optional for consumers, who can choose to take a lump sum in cash instead, the analysts said.

In fact, the practice is the essence of what insurers do everyday, they added.

The bereaved mother at the heart of the story, Ms. Lohman, “believed that” her insurance monies were in a bank, and were FDIC-insured. Quoting the article, “The company’s letter omits that the money is in MetLife’s corporate investment account, isn’t in a bank and has no FDIC insurance.”

Unfortunately, Ms. Lohman “believed” wrongly if she thought “Prudential” was a bank, and that its funds were FDIC-guaranteed. Mistaken beliefs are not a surprising thing when one has lost one’s child. 

But that’s precisely the reason behind retained asset accounts: it saves you from dealing with the complex emotional reality of a check received around the same time as the funeral of the person whose death caused you to get the money. Who among us thinks right at such moments? The validity of the accounts is they let you defer an important decision until you are ready to deal with it, and offer some nominal interest in the meantime.

As to the “omission” about FDIC insurance, the letters also “omit” that they are not insured by Warren Buffet, or Jimmy Buffet, or the local buffet restaurant. Of course they’re not—they’re guaranteed by the insurance company (and often to levels much higher than the FDIC guarantees).

The Real Truth: There’s No Ripoff

Most of the stories on this issue play on the emotional themes of dead soldiers and financial greed; the combination is as old as the villain in a novel. But in this case, it’s manufactured. Again, from the original article:

"Prudential paid survivors like Lohman 1 percent interest in 2008 on their Alliance Accounts, while it earned a 4.8 percent return on its corporate funds…’I’m shocked…it’s a betrayal,’ [says Lohman]

Ms. Lohman may have been shocked, but I can’t see why reporters from Bloomberg news should be. That’s a 3.8% spread on liquid funds. What does your bank make on your checking account balances?   For that matter, how much does your bank pay you on your checking account?

How about Prudential’s customers? Again from the original article:

Metlife spokesman Joseph Madden says his company’s customers are very happy with the Total Control Account. “The feedback from TCA customers has been overwhelmingly positive,” he says. “The TCA affords beneficiaries security, peace of mind and time to make an informed decision — while earning interest in the interim.”

The Real Truth: The Story Headlined Is Not the Real Story Here

The most you can say about retained-asset accounts is that they may unfairly use small-print.

Again quoting from the original story itself:

“Quite honestly, we deal with issues that our members want us to deal with,” says Michael Stevens, senior vice president for regulatory policy at the Washington-based Conference of State Bank Supervisors. “This is not one that has drawn their attention.”

Connecticut’s Insurance Commissioner has said, "I am committed to strengthening consumer awareness regarding this issue… I will not, however, overreact to a misinformed, sensationalized story that did not include all the facts.” He’s right. Regardless of what suspicions this story may have generated about state insurance commissioners, he’s right.

The original article hypothesized that, when people found out ‘the truth’ about these programs, there could be a run on the accounts, similar to a run on banks. I’ll have to defer to a financial expert here, but I find that comparison hard to believe. However, if it ever came true, I think you’d have to look not at the insurance companies but at articles like this for irresponsibly provoking panic.

And that’s what this blogpost is about. What happened with this article is not in principle different from what happened with Shirley Sherrod. An initial article, given a massively misleading headline (just as the Sherrod video was massively out of context), provoked knee jerk reactions in the media and in our politicians.

The issue here is not insurance companies. This story is about instinctive, knee-jerk, swaying-in-the-wind, irresponsible reactions by the press and by government officials. 

That’s two times in just one month. How many more times before they get it right? 

It’s simple. Check your facts; don’t repeat gossip; tell the whole story. 

Note: I emailed the writer of the original Bloomberg article, David Evans, about 30 hours ago, telling him of this blogpost, and linking him to my previous blogpost on the subject.  I wanted to make sure I got his perspective, as he’s clearly been researching this article for sometime, and I think has been busy with fielding it since its publication last week.  However, as of this posting, I have yet to hear back from him. If I do, I will happily repeat here anything he chooses to say. 

Can Advertising Avoid Being Cynical?

I saw a TV ad the other night that intrigued me. 

It showed a mother who had clearly been called to the police station about her son, who apparently had been hauled in for street racing in the family car.  The kid was clearly remorseful and ashamed, not wanting to talk about what had happened.  She was emotionally there for him, but also firmly asking him to tell her exactly what had happened.

The tag line was something like, “Responsibility.  Liberty Mutual.”

Not your everyday ad. 

Now, I like to think I’m as cynical as the next guy, but I have to say, my first reaction was not cynicism.  Instead, I thought, ‘Well that was gutsy.  I wonder if they can back it up?’

Turns out the ad is part of a broader campaign highlighting the notion of individual responsibility  , which in turn is the 2009 version of the company’s broader campaign several-year campaign about responsibility, begun back in 2006 and run by Hill Holiday.    It comes complete with website,, which has had several million visitors since opening in 2008.

Without having looked deeply into it, I have to say I like this.  It’s a relevant issue.  It’s an issue they’ve done a nice job of framing, without overtly anchoring it to a particular political point of view.  And while they do say they’re about responsibility, it still has the flavor of sponsoring a dialogue, rather than of wrapping themselves in the flag. 

Business being business, some idiot had to muck it up a few years ago by buying google adwords related to an advertising exec’s suicide.  

And, my viewpoint is not shared by at least one critic, Jack Shafer at Slate, who calls it pandering on the scale of Chevron’s quasi-environmentalist ads.  

I’m glad Shafer is upholding the virtues of suspicion while I take a day off from it.  Still, at least Liberty Mutual doesn’t address me as “America” and  claim “that’s why we at [PickYourBigCo] is doing something about [PickYourBigIssue]. 

I give them credit.  A dialogue about the concept of responsibility at the individual and social level?  As long as they stand back and let the dialogue roll, I think they deserve the credit they get by associating their name  with it.  

Insurance Fraud, Short-Selling and Why You Can’t Trust Stock Analysts

8AM, July 17, 1989: I’m driving on Route 2 outside Concord Massachusetts, lights flashing and horn honking, fighting rush hour traffic. My son is nearly being born in the back of the car. We reach Emerson Hospital; nurses rush my wife to the ER; I park the car and run back.

Birth time: about one minute after reaching the hospital. Delivery: by the good nurses, a minute before the obstetrician on duty arrives to bless what’s now history.

Two weeks later, the bill arrives. It includes several thousand dollars for the obstretrician. I call to complain. “What do you care,” the office says, “it’s all covered by your insurance.”

9:20AM May 12, 2007: I’m flying from Amsterdam Schiphol back home, reading Joseph Nocera in the Herald Tribune, Why Short-sellers Should Have Their Say. Think of short-selling as the “opposite” of buying stocks—betting that a stock will go down, rather than up.

Since precisely 50% of stock trades involve selling, you’d think Wall Street would put roughly the same emphasis on when to sell as on when to buy. Of course, you’d be wrong. There are few short-sellers, and they are often reviled, harrassed, even sued.

Reasons often given for the dearth of short-sellers are that losses from short-selling are potentially unlimited (true), that short-selling goes against the long-term natural rise of the market (true so far), and that human psychology is basically optimistic (debatable). But those are weak explanations.

The real reason is—wait for it—money. Wall Street gains more when you buy and trade than when you sell. This is one reason securities analysts overwhelmingly issue positive, not negative, ratings. But there’s more.

Companies don’t like negative ratings. To be more precise, CEOs and senior managers of companies with compensation tied to stock performance don’t like negative ratings. Many leaders call the analysts’ parent company to complain, even issue veiled threats to switch to other providers of financial services. Even sue.

And voila, the analysts either withdraw the negative rating or just stop covering the company.

The analyst will blame management for telling him to emphasize positive reviews. Thus he justifies his lapse in professionalism: the devil made me do it.

The poorly rated company blames the analyst for “unfair” analysis (meaning it hurts the CEO in the wallet). Easier to blame the analyst than to take responsibilty for the shortcomings identified.

Management of the analyst firm also caves in, blaming the blackmail tactics of the rated company.

Fingers point everywhere but back. Blame instead of responsibility And blame feeds the rot.

Our social “solutions” propagate the problem. We opt for an expensive regulatory program like Sarbanes-Oxley, to protect everyone from their presumed innate selfish tendencies. Our approach resembles airport security—“somebody will always cheat: let’s constrict everyone’s freedom, in order to stop the few.” But securities markets are not airports.

Far from stopping a culture of blame-throwing, this approach enables it by assuming bad motives.

Instead, we should selectively prosecute the hell out of individuals who behave badly. Prosecute analysts who won’t honor their role, CEOs who blackmail bankers, and bankers who cave in, and who lack the guts to call the cops.

A vibrant community of short-sellers would have seen Enron coming. A few people could have spotted the lies, and made a lot of money by publicizing the rot—saving a lot of lifes’ savings and careers. An MBA class at Cornell did just that—analyzed the numbers and recommended shorting Enron well before it imploded. No one was listening.

Business has no right complaining about government intervention if it can’t bring to bear the pressure of capitalism upon itself. Greed and lies aren’t the stuff of business—they’re the death of business, as long as they stay in dark rooms.

July, 1998, Madison, New Jersey: I go to a collision damage repair shop.

“I’ve got a dent in the back door of my car, can you punch it out? It doesn’t have to be perfect."

“Nah, we’d have to replace the whole door.”

“No you wouldn’t—the gas station will do it for me for a hundred bucks, I figure you guys could just do a better job. It’s a simple job to punch it out, I’d do it myself if I had the tools.”

“Buddy—god alone couldn’t fix that door, we’ll replace it or do nothing at all.”

Translation: “what do you care, your insurance company is paying. And we’re not about to ruin a good scam by being customer-focused.”

We don’t have to put up with this crap. Call your better business bureau. Call your state regulatory agency. Call your insurance company. Write a letter to the editor. Rat these people out.

With the market in nosebleed territory, you might want to short a few stocks yourself. If your broker doesn’t know how, then help create trust and integrity in the market while you make money—by getting a new broker.