A crisis of trust: How do Americans view the financial industry?
By Paul Wilson
It’s no secret that the financial services industry is facing a serious public relations problem. You only need to recall Ned Ryerson, the pushy life insurance salesman in the movie Groundhog Day, or take a look at the latest negative newspaper headline to gain insight into how a large number of Americans view advisors and the industries they represent. Many financial professionals are so well aware of the harsh light in which the industry is viewed by the average American that they even know the individual studies by heart.
In case you haven’t been keeping up, here are a few examples of unflattering studies that have appeared in the last year. In the GfK 2011 Corporate Trust Survey, insurance was voted as the least trustworthy industry by Americans, ranking below even the federal government. Meanwhile, a separate report from the IBM Institue for Business Value found that only 39 percent of consumers in 20 countries say they trust the insurance industry.
The 2011 Edelman Trust Barometer found that only half of Americans said they trust the insurance, bank and financial services industries, the lowest overall percentage of any group. Another study from AXA Equitable found that in the wake of the recent economic crisis, 3 in 4 Americans do not trust financial institutions.
While the numbers themselves are sobering enough, they become downright alarming when one considers the impact that trust, or a lack thereof, can have on a company.
The Edelman study found that when a company is distrusted, 57 percent of consumers will believe negative information after hearing it one to two times, while just 15 percent will believe positive information. By comparison, when a company is trusted, 51 percent will believe positive information after hearing it one or two times, and 25 percent will believe negative information.
“Skepticism has increased as a result of the systemic impact of corporate and government crises, causing a transformation in the framework of trust,” says Richard Edelman, president and CEO of Edelman, in a press release accompanying the study.
"In the human mind, people generalize," says Michael Lovas, communications director at About People and author of several books on trust and credibility. "We do that to keep from going insane with massive data overload. Thus, in the consumer’s mind, everyone in the financial industry is in the same category. Every Wall Street firm, every bank, every insurance agent, financial planner – they’re all lumped into the same bucket. That taints the neighborhood advisor. It’s a combination of poor and selfish behavior, lack of empathy and simple psychology." Reasons for distrust
The rocky economic climate over the past few years and the erosion of retirement pillars like Social Security and Medicare have left Americans scared, confused and extremely distrustful. They've watched their retirement savings accounts and other investments take a beating, while the very institutions whose risky practices helped fuel the financial crisis received bailouts and appeared to get off with little or no repercussions. Meanwhile, American families continue to fight a losing battle against foreclosures, high unemployment, dwindling savings accounts and other lingering effects of the Great Recession.
“Certainly when you hear TARP or bailout it sounds like a free handout for the wealthy,” says Gary Forman, senior vice president at Long Term Care Associates. “Who on Main Street wouldn’t want that sort of help when things get rough? I’m not so sure it’s distrust, but rather anger that fuels the resentment.”
Steve McCarty, co-founder and chairman of the National Ethics Association, agrees that the industry is still dealing with the residual effects of the crisis.
"It’s important to remember that consumers tend to view insurers, banks and financial-services firms as being the same types of firms. So to the degree the public continues to hold a grudge against Wall Street for the 2008 meltdown, it will tar insurance companies with the same brush," he says.
The crisis has also altered the American public's perception of the economy and the ways they invest, according to Lovas.
"The investing public is no longer comprised of trusting innocents. They've started thinking that maybe when the kid yells, 'Wolf! Wolf!' there's actually a wolf out there," he says.
The Madoff factor
Another major contributor related to the financial crisis and fueling the negative perception are the agents who take advantage of their clients. In 2009, Bernie Madoff pleaded guilty to a Ponzi scheme that defrauded thousands of investors of billions of dollars. A steady stream of crooked advisors continue to show up in the headlines and further erode Americans’ trust, but it’s safe to say that Madoff’s orchestration of the largest financial fraud in the history of the U.S. has had a devastating impact on the American psyche.
“Madoff has singlehandedly destroyed the credibility of the financial industry,” says Michael Lovas in his article, Facing down failure: The Madoff factor. “This is not a rational determination, it's the determination made by the "old brain" — the part of your brain charged with keeping you safe. One bad apple and the old brain suggests that you avoid all apples in the future.”
According to Lovas, Madoff’s crime and its fallout affected every advisor and financial planner on a personal level.
“He has robbed you of your credibility. He has robbed all advisors of their credibility. He has also robbed the investing public of their faith in advisors.” The Madoff scandal has caused a dramatic shift in the way clients view their advisors and the industry in general, agrees McCarty.
"Financial rogues are in the media 24/7. The Madoff mess was so massive it tarnished the entire industry’s reputation," he says . "But Madoff is just the beginning ... it’s the small-time scammers who sell Grandma a phony promissory note or churn Grandpa’s investments. All those events add up to one big trust problem for the industry. There’s also a sense out there that 'big, bad' insurance companies are out to take advantage of consumers."
In his article, Due diligence? Get serious, he says, “Clients are now asking themselves, ‘How could this have happened?’ 'Were regulators asleep at the switch?' 'Can I really trust my own advisor?'"
He explains that clients are now choosing to trust, but verify, meaning they’re more likely to research advisor backgrounds and invest in fixed products rather than variable.
“Advisors must now embrace an unprecedented level of transparency. This means wearing their licenses and experience on their sleeve and communicating the substance of their character rather than the flash of their image,” McCarty says.
Another huge factor in the way the financial industry is perceived is the media, which plays a significant role in every aspect of American life — the financial services sector is no different.
“There has been a great deal of buzz lately in our industry among regulators and in the popular press about the trustworthiness of financial professionals. Almost daily, it seems we witness ever-increasing scrutiny by regulators while the media exposes the unsavory and abusive business practices of our industry's ‘bad apples,’” says Mary Quist-Newins in Women and financial professionals: Why should she trust you?
Although it may sometimes be tempting to simply ignore the bad publicity and do your best to carry on, Michael Lovas warns that failure to respond can have dangerous consequences.
“With each hit to the financial industry's integrity, these ideas become more believable to your target markets. If you don't address them, you flirt with denial, and denial is the last step in the fall into failure,” he says. “If you just ignore it, isn't that like jamming your fingers into your ears when someone disagrees with you? If you discount it and scoff at it, you're ignoring the millions of people who are reading and considering the plausibility of it. Knowing that millions of people read this type of material, doesn't it make sense to become familiar with it and prepare a logical, cogent counter to it?”
Many industry professionals are doing just that. For example, Sheryl Moore, president of Advantage Group Associates Inc., AnnuitySpecs.com and LifeSpecs.com has specific sections of her popular website titled “Latest Negative Media” and “Latest Positive Media.” Others write blogs or articles responding to specific criticisms, like Lew Nason’s Rebuttals to the recent bad press about fixed indexed annuities or A letter in response to the article on FIAs, 'Perfect Investment: Often a Trick, not a Treat', by Steven Delaney.
While outside factors have played a significant role in shaping the industry’s reputation, there is plenty of blame to go around.
"The biggest issue is not what the agent has done to the client to damage the relationship, but what they’ve done to each other to damage the relationship with the client," says Gary Forman. "It’s a competitive world, but you can succeed without throwing the other guy under the bus. Just be a better agent."
Indeed, a growing number of advisors and other financial professionals are willing to turn a critical eye on themselves and the industries they represent.
"Oh, how I wish we could point our fingers at some outside force or marketing conspiracy that has turned the world against us," says Rodney Ballance, president of The Financial Leadership Academy. "It would be much easier to take if someone else had caused us to be among the lowest ranked professions in regard to trust. The truth is we agents, and the companies we represent, allowed this dramatic decline in how the public views our chosen profession. Over the past four decades we have succeeded in confusing and often alienating people from even wanting to discuss life insurance as a financial tool."
The long term care industry is guilty of similar mistakes, including a failure to support those in the trenches, according to Steve Forman, senior vice president at Long Term Care Associates. He cites the fact that a 54-page booklet for consumers produced by the industry's commissioner doesn't include a single mention of the word "agent" or "producer." Meanwhile, in Washington, where the Steve and Gary Formans' business is located, the state's LTCI website advises consumers to speak with various professionals about their LTCI needs, but fails to mention producers in the list of recommended contacts.
"Instead, the kind of ringing endorsement we get from our insurance department is a press release each time an agent or broker has been reprimanded, fined, or has had a license revoked," says Steve Forman. "As a consumer just barely paying attention, you would think it's a game of cops and robbers, and if not for the watchful eye of insurance department, producers would be out in the field robbing grandmothers blind."
Ethics and the role it plays in advisors' daily activities is one area that receives continual scrutiny within the industry. But although ethics are a deeply personal matter, regulation must play a key role within a professional context. A lack of consistency can damage trust and leave consumers wary, suggests Quist-Newins. "Perhaps part of the problem with our trust image is that we do not come together as an industry to offer and promote a common set of ethical standards," she says. "I believe it is very likely we will see this change in the coming years as a result of more uniform industry standards, regulatory requirements and/or consumer demand. Our business is incredibly complex and changing. It is vitally important that we all work to increase our own technical skills and competencies, and encourage our peers to do the same."
Agents of change
Americans' increased wariness and cynicism doesn't change the fact that now more than ever, they need professional financial advice. Even more common than the studies about a lack of trust are those highlighting consumers' concerns about their financial health and retirement plans. No other group is better able to assist them than financial advisors.
"Remember that surveys show that consumers may mistrust insurance companies, but they trust their own advisors. So from the advisor point of view, the trust issue isn’t quite as dire as all these trust studies indicate," says Steve McCarty.
"The public need for our help is great. We see an astounding lack of financial literacy and action," says Quist-Newins. "These twin dilemmas have contributed in part to the economic malaise in which we now find ourselves. Financial professionals can be a key to a brighter future for individuals and our society as a whole. Studies have consistently shown that men and women save and invest more when working with a financial professional. If only they would trust us more."
According to McCarty, it's important to differentiate yourself from the stereotypes of the shady advisor and the uncaring insurance company.
"The key is to remind people that the Bernie Madoffs of the world are an extremely rare breed. Advisors like you — the vast majority — are honest and hardworking and do their best to render great service to their clients," he says. "And as for the big insurance companies, stress that you have the experience and knowledge to be your clients’ advocate. You can help them buy an appropriate product and get the claims service they deserve. Without you, your clients would be left alone just hoping insurers do the right thing."
Gary Forman also emphasizes the importance of developing personal relationships with clients. Not only does it build trust, but it helps agents separate themselves from negative associations with faceless, uncaring companies.
"Although corporations in general are mistrusted, you really can't paint all agents with that same brush," he explains. "Most agents are thoughtful, independent professionals who have their clients best interests in mind. They work in small, local offices and they work hard to earn their clients' trust."
In the end, changing the industry's negative perception is largely a matter of personal responsibility. Producers must be ethical and consistent, providing their clients with a reliable source for the information they so badly need.
"Trust is an unforgiving master," says Steve McCarty. "The key lesson is to raise the bar in every area of your business. Get better at assessing client needs. Get stronger at recommending the right products. Get smarter about jumping through the administrative hoops involved in getting your clients protected. If you don’t do this, you’ll make mistakes, and those mistakes will demolish client trust and kill your business."