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.

And You Thought The Purpose of a Bank Was to Make Loans?

I’m no economist or banker, so I occasionally labor under the delusion that banks are supposed to lend money to credit-worthy people. Of course, they diluted the definition of "credit-worthy" a few years back. That ruined their liquidity. Then the Feds stepped in with the Troubled Asset Relief Program.

Silly me, I had also thought TARP was partly aimed at restoring banks’ ability to lend money again.

Read the following (real) tale of woe from a qualified would-be borrower–let’s call her Jane–and ask yourself why Wells-Fargo would be so hesitant to lend.

For a clue, look to the end of Jane’s tale.

Jane’s Tale: If I Can’t Get a Mortgage, Who Can?

Last spring my sister and I decided to build an addition onto our vacation home in Northern Minnesota. Given today’s economic climate, we knew it wouldn’t be a cakewalk but we had no idea what a nightmare lay ahead.

Our family has owned lakefront property on Lake Superior since 1971. It’s prime vacation area with large million-dollar+ homes built on either side. Our parents deeded us the property 20 years ago, mortgage already paid off. After our mother died last year, we decided to build an addition. We hired an architect and a contractor with a long and credible reputation and a crew ready for work. We looked for a bank that would provide a construction loan for $250,000, for conversion to a mortgage when construction was completed. We went with Wells Fargo in Duluth. Their banker told us a loan was possible, but we’d need to open a business account first. My sister deposited $30,000.

Two weeks later, I was in the bank’s mortgage department armed with my loan application and identification; 2007 and 2008 tax returns; pay stubs; bank statements; property tax and home insurance records on this and my primary residence. He soon persuaded us to quit claim the LLC. I would become the sole applicant for the loan because I was an “ideal customer.”

Here’s my profile:

  • My income is in the top 10% of U.S. households; I’ve been a senior executive for ten years with an international NGO;
  • I own a car and home in the NYC area and paid off my mortgage in 2001;
  • I have one child in college and another who has graduated and is self-supporting;
  • I have two credit cards which I pay in full every month, my credit score is 775;
  • I have liquid assets worth more than the value of the loan; my retirement account is substantial but not lavish after the 2009 freefall;
  • The title search is clear and the appraisal of the lakefront property is $520,000.

The bank then required me to close the business account and open a personal account. I transferred the $30,000 and added $5,000 for good measure. I requested and got written permission for an “early start” on the construction because we needed to get the foundation poured before the Minnesota winter set in. For the next two months I endured slow torture at the hands of Wells Fargo and their big, bad “underwriter.” They peppered me with dozens of demands for information and ridiculous questions (Q:“Where did the $30,000 deposit come from?” A: “From the Wells Fargo business account you required me to open and then close.”). I was asked to fax my driver’s license four more times and to disclose the terms of liquidating my 403B.

When I was asked to explain why I made a late payment on my VISA bill in February of 2002 (7 ½ years ago!) I blew my top. For seven long weeks I was told that if I just met a few more conditions we could go to closing. These requests came from various Wells Fargo offices around the country – and were often redundant. When I asked to speak with the underwriter directly I was ignored.

Meanwhile, we were continuing to pay cash to our contractor so that our beautiful house could go up before winter. I reminded the banker that every delay in closing meant that I would be borrowing less money and they would earn less interest. Did they want to make a deal or not? We set a closing date of October 16. Ten days before, I had a conference call with the mortgage banker in Duluth and the Senior Relationship Manager in Minneapolis. I reminded them that I was flying out to Minnesota so they needed to tell me exactly what I should bring with me for the closing. The answer was “only your driver’s license.”

On October 15, hours before I was to board my flight for the scheduled closing, I was presented with several more conditions that had to be met (Q: “Could I explain the large deposits made into my Citibank account in the last month?” A: “You’ve seen my paystubs; that is my income.”) and then “we should be able to close in five days.” The banker’s e-mail said, “I imagine having been run through the gauntlet…that it is doubly frustrating to have to provide so much detail when you are clearly the kind of borrower any bank should love to have.”

At that point I realized I was never going to get a loan from the mortgage giant Wells Fargo, nor are they seeking ideal customers who pay their loans. Happily, our architect is talented and trustworthy and our contractor is honest and hard-working. Those business relationships have been highly professional and free of impediments. We can finance our second home without paying Wells Fargo $50,000 for the privilege of lending us money. But IF I CAN’T GET A MORTGAGE, WHO CAN?

No wonder we have a credit crisis in this country!




Wonder why Wells-Fargo was so unwilling to lend, and unwilling to talk about it? Here’s a clue.

It was announced a couple days ago that Wells Fargo bought its way out of TARP, including its restrictions on executive pay, etc. To get there, as I understand it, they had to restore their loan-to-capital ratio. One way to do that is raise more capital; another is to make fewer loans.

Draw your own conclusions, and share them here.


Have We Learned from the Financial Crisis?

Most people would agree that something went awry with large parts of the global financial system.  Most would also agree with some broad-brush characterizations of just what went wrong.  A bit too much greed, self-orientation, short-termism.  A bit too little customer focus, ethics, regulation.

Hopefully some of the overheated sectors learned something, or were at least chastened.  Then again: don’t hold your breath.  Here are some anecdotal samplings from the home lending and the financial advisory segments.

Ethical Improvements in the Home Appraisal Business

In an April story the Center for Public Integrity reports:

In a 2007 study by October Research, a real estate news provider, 90 percent of more than 1,200 appraisers polled reported feeling pressure to change property values, usually from lenders, mortgage brokers or real estate agents.

How much pressure?  All too often, if appraisers didn’t come up with numbers that fit what lenders wanted, they found themselves blacklisted.  How overtly?

Amerisave, one of the largest online mortgage lenders, has close to 12,000 appraisers on its “ineligible appraiser list,” which was removed from the Atlanta-based company’s website after the Center made inquiries about it.

Actions taken?  NY Attorney General Cuomo did some vigorous investigation; one results was a Freddie Mac new “Home Valuation Code of Conduct” to go into effect May 1. 

Who opposed it?  Why, the National Association of Mortgage Brokers, of course. 

The same people who, when JPMorgan Chase’s Jamie Dimon said his failure to terminate the company’s mortgage broker business was the “biggest mistake of his career” responded by saying Dimon’s remarks “clearly reflected his poor understanding of the mortgage industry.” 

Uh, NAMB vs. Jamie Dimon? Tthat’s one you lose on credibility alone, NAMB.

NAMB’s excuse for its role in the mortgage debacles?  Others did it too.  So much for ethical learnings.

Ethical Improvements in the Financial Planning Business

There are principled, ethical, customer-focused financial planners; I’ve met many, and know a few well.  At the same time, I think few would argue that the sector is a hotbed of high ethical behavior. reports:

According to a recent study by Prince & Associates…15 percent of the wealthy left their financial advisors in 20087 and 70 percent took at least some of their assets out of the advisor’s hands.

Why?  False advertising, says Cerulli Associates in the same article: what an advisor says he offers and what he really does aren’t in sync.   Bill Bachrach, a respected (by me as well as by the industry) consultant in this space says:   

“It’s been way too easy for former stockbrokers to gather assets and dump them somewhere and call themselves wealth managers…If asset management is all you do and you can’t point to some other way you make money, you have nowhere to hide when performance goes south.”

What’s the industry response?  Here’s Ken Fisher, a mega-marketer of financial services, responding to two former sets of clients who are suing him for failing in his fiduciary responsibilities:

The lawyers who are representing the clients in both matters are “similarly incompetent."  Both cases “will run into a concrete wall.  The person who will be sorry in the end is the client, who will wind up spending money on lawyers and getting nothing.”  [Fisher said he wanted to teach one lawyer] “a lesson he won’t forget.” 

Now there’s a client-focused kind of guy.  The kind you’d want out front promoting responsible behavior on behalf of your industry. Customer satisfaction?  Let them sue for it, then endear them to you through public insults and threats.  Great strategy, Kenny boy. 

Then there’s the case of Jeffrey Forrest,  fired by his broker dealer, sued by the SEC to keep him from working as an investment advisor.  He continues to run an RIA firm in California, and is licensed to sell insurance there.  In March, he and Associated Securities, for whom he was a top producer, were found guilty by a FINRA panel. 

Associated Securities—surprise surprise—is appealing.  Another great customer lesson: never admit you’re wrong.  Especially when you are.  Goebbels had that one down pat. 

Last but not least.  Finally, after all the Madoff hoopla—some concrete action:

SEC commissioners on May 14 voted 5 to 0 in favor of a proposal that would require the roughly 6,000 federally registered investment advisory firms that deduct their fees from client accounts to undergo surprise audits. The move is part of a wider effort by the regulator to crack down on advisers with direct custody over client holdings.

Exactly.  Bernie made off with all the money by skulking in the gray spaces between regulators: for example, he custodied his own investments and no one checked on them. 

So, surprise audits?  You betcha, right on, about time. The industry should applaud this effort to help improve its reputation.  Thank you SEC!

But, wait.  The proposal is opposed by the FPA, NAPFA  and the IAA

Why the resistance?  Here’s a taste:

A surprise audit would likely cost his firm about $3,000 a year, said Ben Baldwin…That fee would likely be passed on to clients, he said.

“There should be an uproar because it’s going to hurt a lot of consumers,” Mr. Baldwin said.

Others contend that the proposal would force smaller firms to stop deducting fees from their clients’ accounts — a move that would require them to wait for clients to reimburse them for their services.

A National Board member of NAPFA elaborates further:

“When you deduct your fee from the client’s account, you have no cash-flow problems.”

And that, I guess, would be why NAPFA opposes the SEC’s proposal.  Because it would force advisors to send invoices instead of directly deducting fees.  Thus slowing cash flow.

More Madoffs?  An occasional small price to pay if it helps protect advisors’ cash flow.

There are simply too many players like the ones quoted in this post who still see regulation as a hateful intrusion on their god-given right to extract cash from customers’ wallets unless expressly forbidden by federal law.

And there are simply not enough players who see regulation as the regrettable consequence of the presence of the former group of players.  They do business based on the simple idea that you should treat people, and most certainly customers, decently.  It can’t be easy for you to watch the first group so demean your industry’s reputation.

Many from that first group must have read a blogpost of mine from two and a half years ago: How to Get Your Industry Regulated in 6 Easy Lessons.  They’re executing the six lessons marvelously, and I have no doubt they’ll succeed beyond their wildest dreams very soon now.

From Financial Relationships to Financial Transactions, Losing Trust on the Way

The New York Times this Sunday has initiated an ambitious and comprehensive look at the financial crisis facing us. Gretchen Morgenson, a crack business writer, has not only her normal Sunday business page lead, but also the entire issue’s Main Section Front Page lead.

And rightly so. Count me among those who believe this is no ordinary recession; we’ll live to live again, but there has been huge financial misbehavior by all of us for a very long time; we’re going to have to pay the piper for some time to come.

Morgenson points out we doubled our mortgage debt in 7 years as a country; our savings rate—at 8% in 1968—is now 0.4%. And the biggest scorecard of all is the fall of the dollar, already precipitous, and likely to get worse.

One of the patterns that emerges is the conflict we have created in the world economy in the last two decades between efficiency and trust. It’s a major trust issue—one of social and political structure.

Here’s the idea.

The global financial system has gotten far more efficient by applying business process thinking “best practices.” Define processes so they can be outsourced to others, the thinking goes, who can then do those processes at a global level of scale, more cheaply.

That logic is what drives the outsourcing of payroll and benefits processing. It’s the same logic that drives mortgage lenders to sell loans to banks, and banks to package them to asset packagers.

It has in many ways worked: more capital became more available in more places to more people more quickly and at lower costs than had been the case 20 years ago.

Unfortunately, there was a side effectT—the substitution of short-term transactional fee income for longer term relational income sources (like interest).  And fee income has turned out to be the crack cocaine of the financial industry.

It isn’t just mortgages. It shows up in banks every time you get hit for $2 to withdraw $100 from an ATM not your own. It shows up in credit cards—in late fees and over-limit penalties, in huge rates for cash withdrawals. And of course if you refinance a mortgage, fees abound—enough to become the primary source of profitability for the refinancing institution.

Who cares about your damn loan when they can make money off of the act of taking out the loan, and more money out of selling it to someone else. Give ‘em a ten-year balloon loan at teaser rates. On Wall Street, the moral decline was captured with the phrase, “I’ll be gone, you’ll be gone—just do the deal.”  Gimme more crack—gimme the fee income, you can have the relationship and the loan.

So here’s the social trust issue.

One of the four Trust Principles (see my article “Trust: the Core Concepts” or my book Trust-based Selling) is the focus on relationships, not transactions; on the medium-to-long term, not just the short-term.

That idea is pretty simple and clear. Trust thrives in relationships, not in random encounters between strangers. Economic models that link entities—and people—allow trust to grow.

Economic models that structurally dissociate people—blind online bidding systems are an extreme case—are at best trust-neutral, and in many ways trust-destroying (in the case of blind online bidding, that is in fact the intent).

So we have a dilemma. The economics of outsourcing processes has indeed resulted in lower costs. It has also resulted in lower trust.

Can we have both? And if so, how?

I don’t have the full answer, of course. But I believe the answer is going to rely on two things:

  • The political will—in government and in business—to recognize that, in the long run and in the big picture, we are all inextricably linked, and we’d better behave as such. In other words, an ethos or common belief-set based not on competition, but on collaboration.
  • The insight that low cost alone does not drive value; that relationships, in fact, are the source of far greater value than the micro-process-here-now-self-aggrandizing instincts we have been propagating as “best practices.”

It ain’t going to be easy, though.

Decaying Social Trust and Moral Indignation

Pop quiz!

Who wrote: “This is how the world will end—not with a bang, but a whimper.”

a. T.S. Eliot
b. W. H. Auden
c. Robert Frost
d. e.e. cummings
e. Alfred E. Neumann

Answer at the end; no fair peeking.

I don’t know about the world, but the subprime/mortgage/credit crisis shows how social trust ends. Not with a whimper, but with righteous moral indignation—on all sides.

We are in the midst of the deflation of a debt or credit bubble, itself based on an asset bubble—overpriced houses. As of today, according to the Mortgage Bankers Association, 24% of subprime mortgages are delinquent or in foreclosure; ditto for 4% for prime mortgages; and for all mortgages it’s a record 7.9%, the highest since records began in 1979.

Everyone played musical chairs. And the more frantic the music, the more rightous the talk.

Here’s the Heritage Foundation—mind you, just last November, 2007—demonstrating its utter subordination of logic to ideology, arguing against H.R. 3915, a House bill to reign in predatory lending:

[the bill] would establish an explicit series of credit standards for lenders, which could have the effect of excluding many moderate income borrowers from the ownership market. In sum, the enactment of H.R.3915 would delay the housing market recovery that is now struggling to get underway.

Yup, Congress killed the real estate bubble appreciating market.

A year earlier, in September 2006, the Mortgage Bankers Association stated that

“the subprime market has evolved dramatically in recent years, providing significant benefits to consumers…increasing regulation could decrease competition and increase rates that the subprime market offers consumers.”

But this is not a populist rant.  Consumers were far from just hapless victims.

An FBI Mortgage Fraud report 3 months ago stated that up to 70% of early payment defaults may have been linked to buyer misrepresentation on loan applications.

What about FICO credit scores?  Courtesy of BusinessWeek, meet “credit doctors,” companies who will manipulate credit ratings by blitzing credit agencies with disputes about old reports (which have likely been lost), setting you up as an “authorized user” of an account owned by someone with good credit, or just creating paper accounts.

“All legal,” they protest. Of course. No miscreants here.

So—end game—bang or whimper?

Dateline, CBS Evening News February 12, 2008.  Meet Karen T., a married San Francisco suburbanite who bought a condo as a second home for $505K, financing it 100% with mortgage debt. Now it’s worth $340K, and her adjustable mortgage goes up $900 this June.

They own another home. They can afford the rate increase. So—what to do?

Karen’s answer?  Walk away. Default.  Give it back to the bank.

Is Karen distraught? Not really. “I’m not doing anything illegal.  Everything’s negotiable in business—this is just another business decision. I don’t see why this is any different. I’m within my right to walk away from a bad deal.”

And 60% in an LA Times Real Estate blog poll agreed with her.

Karen is morally indistinguishable from a landlord turning off the heat under rent control; insurance companies withdrawing sole-provider coverage from unprofitable markets; banks charging usurious credit rates; emergency rooms turning out the uninsured; de facto mortgage redlining; and a thousand forms of “fine print."  Or—come to think of it—from a banker foreclosing on a never-should’ve-approved-that-loan loan. 

The rallying cry is always, “I’m not doing anything illegal.”

But here’s the kicker.

Karen’s not morally indignant about walking away. To her, that’s “a business decision.”

No, her moral indignation is reserved for the consequences she might face.  She leans her face on her hand, her voice intensifying, as she says, “It is devastating to think that my credit scores are going to drop 200 points," she said.

OMG, it’s just so, like, unfair!

Huh? Devastated because you were educated, had the money, and placed a 100% bet on an overheated market—and lost? And you can afford to pay the piper—but don’t want to?

Take a trip to Vegas, Karen, and see if the blackjack dealers buy it.  Better yet, go tell it to someone with half your education and income who’s been foreclosed on after having spent their last money trying to pay the bank. 

It doesn’t matter who started the food fight.  It seems that the decay of social trust is accompanied by higher levels of self-righteousness and narcissism on both sides.

When business and consumer alike choose moral bankruptcy over financial bankruptcy—without even thinking about it—and then justify it indignantly through Darwinian arguments—well, Houston, we’ve got a problem in trust-land.  Not to mention ethics-land. 

Oh yeah—T.S. Eliot