Trusting people carries risks. Finding better ways to mitigate and manage these risks is a continuing challenge for individuals, institutions and society at large. Sometimes, however, the best learning opportunities arise when trust breaks down
Trusting people carries risks. Finding better ways to mitigate and manage these risks is a continuing challenge for individuals, institutions and society at large. Sometimes, however, the best learning opportunities arise when trust breaks down.
As a practical necessity in everyday life, we have faith that most people are fundamentally ethical and can be depended upon to be helpful and truthful in our dealings. Not everyone will meet these expectations, so we are generally careful to look for signs that our trust may be misplaced and adjust our behavior to avoid those who can't be trusted.
The trust we place in professionals is in an altogether different dimension. We cede a great deal of control over our medical, legal and financial affairs to them.
When professionals misuse their power and prestige to take advantage of those they are supposed to help, the consequences can be catastrophic.
The lies and hypocrisy involved in scandals of this type are disorienting, and initial reactions are heavily influenced by personal perspectives. This point is memorably captured in the movie “Catch Me if You Can,” in which Leonardo DiCaprio plays the serial imposter and master check forger Frank Abagnale.
VALUABLE CONCLUSIONS
At one point in the film, Frank creates the persona of a doctor to win the affections of Brenda, a wealthy young woman, and her family. On the eve of Frank's wedding to this young woman, the FBI closes in on him and arrives at the wedding party to arrest him.
Frank sees the agents coming and rushes to a room where he has stored suitcases of money, dragging Brenda with him. As he throws open the suitcases to stuff clothes in with the cash he confesses to her: “I'm not a doctor: I never went to medical school. I'm not a lawyer or a Harvard graduate or a Lutheran.”
Still overwhelmed and befuddled by what she is seeing and being told, Brenda's only response is “Frank? Frank? You're not a Lutheran?”
Although individual reactions at the time of a scandal may not be particularly helpful, with the benefit of hindsight, there are valuable conclusions that come into focus.
First, people in the highest positions of trust pose the greatest risks. Mr. Abagnale impersonated doctors, lawyers, and airline pilots because those positions imply inherent trustworthiness.
He chose those lines of work because they gave him greater access to money and made it easier to pass checks, with fewer questions asked. Mr. Abagnale also was smart, engaging and a gifted speaker so he was accepted at the highest levels of the professional fields he entered.
We should expect the worst violations of trust to be committed by those who enjoy the greatest public presumption of trustworthy conduct.
Fiduciaries occupy that position in financial services. They exercise the most control over other people and their money. Therefore, they require the strongest institutional oversight.
Professionals whom the public assumes to be trustworthy can do the most damage and therefore require the most scrutiny.
Second, it is what people do that matters, not what they call themselves. The fact that fiduciaries pose the greatest risks doesn't mean that we should simply restrict the number of people who are referred to as fiduciaries.
If clients perceive themselves to be in a trust-based (fiduciary) relationship but the regulatory system exempts or fails to recognize de facto adviser control over the clients' assets, there is a heightened risk of abuse. Such gaps in regulatory oversight weaken the potential for deterrence and detection of bad behavior.
This means that brokers, insurance agents and other financial representatives must be held to an undiluted fiduciary standard to the full extent to which they are relied on for objective advice or to exercise control over client assets. Full recognition of where fiduciary status exists and enforced adherence to fiduciary practices mitigates risk.
Finally, James Madison was right when he said in Federalist Paper No. 51: “If all men were angels, no government would be necessary.”
Unfortunately, humans are fallible and some are corruptible.
Good governance is needed, not just through laws and regulations but also through strong compliance oversight within financial services firms, rigorous standards of conduct established by professional associations, and personal and professional mores that include an expectation for individuals not to turn a blind eye to wrongdoing.
Blaine F. Aikin is chief executive of Fiduciary360 LLC.
