hardly any confidence in this sector increased from below 10 percent in 1970 to 42 percent in 2011. The article was written in 2011, three years after the crisis.
This observation is in line with the findings of the 2014 Edelman Trust Barometer, which refers to an annual trust and credibility review by research firm Edelman Berland.3 Their trust index shows that globally, roughly 50 percent of the people have (some level of) trust in the financial sector. It should be noted that among the various financial services sectors, financial advisory and asset management have the lowest scores, in some European countries even as low as 21 to 23 percent (according to the 2013 report).
Although the confidence problem does not seem to carry the same weight in every part of the world, the fact remains that according to the Trust Barometer the financial sector as a whole emerges as the least-trusted globally. That is not good, to put it mildly, for a business that more than any other sector should be based on trust.
No matter how self-inflicted this situation, the effects of low confidence are potentially harmful. Not only for those private banking professionals who work hard to make an honest living – which in our experience applies to the vast majority – but also for the clients (i.e., the ones who distrust the services).
What would happen if we didn’t trust the legal system and as a result we created and enforced our own rules? Anarchy and chaos would be unavoidable. What would be the result if we didn’t trust medical specialists and therefore resorted to self-surgery? Life expectancy would most likely plummet.
The same applies to private banking. If due to distrust of the banks and other service providers we decide to manage our own wealth, we demonstrate a risky underestimation of the value that a private banking professional can add. Qualified and sincere private banking specialists do actually add value. The many years of experience in managing and structuring wealth have taught us valuable lessons. Ignoring this added value is potentially harmful for your wealth.
We mentioned it already: Being rich comes with typical wealth-related challenges and concerns. Most of these can be effectively addressed with the help of experienced professionals. However, a fundamental lack of faith in the soundness and professionalism of the industry will raise an impenetrable barrier, effectively blocking the development of trusted relationships, thus suppressing the value-adding potential of such relationships. Clients will end up collecting ideas from various sources and then follow their intuition in deciding on a course of action, most likely at the lowest possible fee.
For the private banking industry to be able to unlock its full value-adding potential, confidence in the sector is a prerequisite. Current levels are too low. This not only is a threat to the professional standards in the industry, but also represents a serious risk to the financial health of the rich.
The key to success, which is in everybody’s best interest, is to develop and maintain an industry that can be trusted.
Building Trust and Confidence
If we agree that trust and confidence are indispensable ingredients for a truly value-adding private banking industry to flourish, how, then, can we build trust to the required level?
Before we elaborate on this question, we first need to define the concept of trust. For that we refer to Maister, Green, and Galford, who define trust in their bestselling book, The Trusted Advisor,4 as the result of credibility times reliability times intimacy, divided by self-interest:
1. Credibility, simply put, refers to perceived competence. Competence judgments depend on content expertise – qualifications, experience, and so on – and presence, meaning how we look, act, react, and talk about our content. An impactful way to convey credibility is to demonstrate that you understand your clients’ needs better than they do.
2. Reliability is about whether clients think you are dependable and can be trusted to behave in consistent ways. Judgments on reliability are strongly affected by the number of times you interact with a private banker: We tend to trust the people we know well.
3. Intimacy refers to the willingness and openness to talk about personal, difficult, and sensitive issues.
4. Self-Interest (or self-orientation) refers to the perceived level of care: The more a private banker demonstrates that he really cares about the client, the lower his perceived self-orientation or self-interest.
Agreeing that these are the four ingredients of trustworthiness, how can we build and develop trust?
Following a frequently used typology of trust, we identify three levels of trust:5
1. Deterrence-based trust
2. Knowledge-based trust
3. Identity-based trust
Deterrence-Based Trust
Deterrence-based, or rule-based, trust is the most fundamental, basic level of trust. It means that the behavior of other people is to a large extent predictable thanks to rules and regulations. The likelihood that the other abides by the rules is high due to the anticipated repercussions of not complying.
With regard to private banking, the regulator is the main actor when it comes to increasing deterrence-based trust levels. In almost every jurisdiction, often in an internationally coordinated fashion, the regulator has indeed taken firm steps in an effort to regain the confidence that was lost by the financial crisis. Therefore the focus has been very much on minimizing conflicts of interests and increasing quality.
This can be highlighted by a few examples:
● In most jurisdictions, the bonus structure has been scrutinized. It is no longer deemed acceptable that a private banker who generates significant revenues by taking excessive risks in his clients’ portfolios be rewarded with a large bonus.
● Private bankers have to document why they have given their clients certain advice. This is to ensure that there exists a proper trail, proving that the private banker provides suitable advice (i.e., advice in line with the recorded risk appetite of the client), as well as advice that aims to serve the best interests of the client (e.g., MiFID II).
● In many jurisdictions, full price transparency has been enforced. In some jurisdictions, hidden provisions (e.g., kickback fees from fund managers) are now prohibited. Price transparency enables clients to understand the private banker’s interest in the products and services offered (e.g., MiFID II).
● Private bankers have to make much more effort to explain the risks of their products and services to their clients as well as to ensure that their clients understand these risks. These risk explanations have to be recorded, either through voice-log or in writing.
● In many jurisdictions, individual private bankers are forced to meet certain minimum certification requirements, followed by an obligation to continuously develop their knowledge and skill base. This is to ensure that the overall professional standards of the industry are sufficient to allow the public to rely on the services of the regulated and licensed private bankers.
● In some jurisdictions, private bankers have to pledge a professional oath, declaring that at all times they will place the interests of their clients above their own interest.
● As known cases of internal fraud cause great harm to the private banking industry as a whole,
“Edelman Trust Barometer
David H. Maister, Charles H. Green, and Robert M. Galford,
See, for example, Randy Conley, “Three Levels of Trust: What Level Are Your Relationships?,” June 6, 2011, leadingwithtrust.com.
