Hiring practices key focus in the wake of scandals

Psychological profiling, candidate screening can help with crisis prevention

Mar 3, 2008 @ 12:01 am

By Charles Paikert

Recent scandals have taught financial services firms to scrutinize the people they hire more closely. The realization that hiring practices are key to avoiding scandals was heightened after a rogue trader at Société Générale made unauthorized trades that cost the Paris-based firm more than $7 billion in losses and five former insurance company executives were convicted of fraud last week. Psychological profiling and screening of potential employees, for example, have become important tools in crisis prevention and risk management, according to industry executives and experts in the field. Tests such as the Minnesota Multiphasic Personality Inventory "should be given to anyone in a senior capacity at a financial services firm. It's one more validation that the person is honest and ethical," said Dr. Laurence Barton, president of The American College in Bryn Mawr, Pa., and author of the recently published "Crisis Leadership Now: A Real-World Guide to Preparing for Threats, Disaster, Sabotage and Scandal" (McGraw Hill, 2008).

<b>Laurence Barton:</b> A personality test such as the Minnesota Multiphasic Inventory
+ Zoom
Laurence Barton: A personality test such as the Minnesota Multiphasic Inventory "should be given to anyone in a senior capacity at a financial services firm."

"We're seeing more [pre-employment psychological screening] among executives and mid-level managers where people have wide responsibility for large teams," said Dr. Alan Friedman, an associate professor of psychiatry and behavioral sciences at Northwestern University's Feinberg School of Medicine in Chicago, and a consultant to financial services companies. While psychological screening "isn't a panacea, it can and does provide sound insight as to whether someone has better coping skills, [and it helps with] knowing whether the person has the potential to be stable under stress, explosive, manipulative or be able to operate through the high seas of finance with stability," he said. Dr. Friedman's clients include MetLife Inc. of New York and Cole-Taylor Bank of Chicago. Psychological profiling works, said Steve Lockshin, chairman and chief executive of Rockville, Md.-based Convergent Wealth Advisors LLC. "It nails people," he said, referring to a profiling test known as the Productivity Index. "You can find out if someone is too emotional or not detail-oriented, or less likely to follow rules." Reference and background checks have become "more and more critical" for financial services firms, said Tom McLane, vice chairman of RSR Partners Inc., an executive search firm based in Greenwich, Conn. RSR is now doing more "behavioral interviews" with prospective job candidates, he said. "We want to find out not just what they did but how they did it," Mr. McLane said. "Our job is to find people who do the right thing the right way." And Dr. Barton, who has also worked as a consultant, said he is advising financial services firms to conduct "multiple interviews with multiple people" before making a hire. "Broker-dealers, banks and advisory firms shouldn't hire people based on one interview with one person," he said. "More than one person in an interview enables you to pick up on different things, and more than one interview enables you to pick up on inconsistencies." Firms are also paying more attention to new employees, even after they're hired, to make sure they understand the rules and culture of the firm, executives said. "We call it 'on-boarding,'" said Doug Regan, an executive vice president of Northern Trust Corp. in Chicago and president of its wealth management group, "[We] develop an internal network for the new employees to make sure they are appropriately oriented within the company."

<b>Thom Melcher:</b> Hawthorn is attempting to promote a
+ Zoom
Thom Melcher: Hawthorn is attempting to promote a "risk-averse culture."

Hawthorn, a Philadelphia-based wealth management firm and member of PNC Financial Services Group Inc. in Pittsburgh, is attempting to promote a "risk-averse culture with good sound controls across the board," said managing director Thom Melcher. "We make sure to educate employees and prospective employees about the culture and how things work in the organization," he said. Dr. Barton also urged financial services companies to pay more attention to postings on the Internet by disgruntled or former employees that could be harmful to the company. "The rules of 2000 don't apply to 2008," he said. "There were no blogs then, and you didn't have advisers with pages on MySpace and Facebook where they can say whatever they want about a company or post confidential memos," said Dr. Barton, referring to two popular networking websites. Unfortunately, said Daniel Solove, author of "The Future of Reputation: Gossip, Rumor and Privacy on the Internet" (Yale University Press, 2007), "there's no good way to prevent such attacks. The best response is to respond. Firms shouldn't ignore attacks and hope they go away. They should be quick and responsive, explaining their side of the story." Financial services firms have also been beefing up technology security and risk management oversight. In January, St. Petersburg, Fla.-based Raymond James Financial Inc. purchased new software to support regulatory and internal compliance guidelines, and Mr. Regan said Northern Trust has spent about $1 billion over the past three years on technology enhancement.

<b>James Adelman:</b>
+ Zoom
James Adelman: "We spent a lot of time latelly on a disaster recovery plan, IT security and internal audit reports."

According to James Adelman, general counsel and head of the privacy office and anti-money-laundering initiative at Commonwealth Financial Network in Waltham, Mass., the company undertook a risk analysis several years ago after being stung by an adviser who misappropriated funds, and now has a permanent risk committee that meets quarterly.

Commonwealth's head of operations, head of technology and chief financial officer are all on the committee, he noted, and "any subject comes up."

"We've spent a lot of time lately on a disaster recovery plan, IT security and internal audit reports," Mr. Adelman said.

The unauthorized Société Générale trades and last week's fraud case, involving a scheme to manipulate the financial statements of New York-based American International Group Inc. have undoubtedly "triggered more awareness of what can go wrong" at a financial services company, Mr. Melcher said.

Even though the financial services industry has greatly improved systemic risk management, Mr. Regan said, "these stories show that there is still opportunity for episodic risk."

E-mail Charles Paikert at cpaikert@investmentnews.com.


What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


Are investors getting complacent?

Tom Florence, CEO of 361 Capital, discusses growing investor complacency and why he thinks overconfidence might be creeping into adviser and investor decision making.

Latest news & opinion

Nontraded REITs to post worst sales since 2002

The industry is on track to raise just $4.4 billion, well off the $19.6 billion it raised just four years ago, as new regulations hinder sales.

Broker protocol for recruiting a boon for clients

New research finds advisers whose firms have joined the agreement take better care of customers.

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print