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Reform Is Not Enough to Restore Trust in Wall St., Experts Say

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Knut Rostad, president of the Institute for the Fiduciary Standard, hosted a conference call Thursday to discuss research conducted by American Enterprise Institute and Labaton Sucharow about Americans’ attitudes toward Wall Street and financial professionals.

On the call were Kevin Carroll, managing director and associate general counsel for Securities Industry and Financial Markets Association (SIFMA); Karlyn Bowman, senior fellow at American Enterprise Institute; and Jordan Thomas, partner at Labaton Sucharow.

“Fiduciary duties buttress investor trust, the central pillar on which financial trust exists,” Rostad said. He referred to data from Harris Interactive that found in 2012, the firms with the best reputations among consumers among the 60 most visible companies were Amazon, Apple, Disney and Google while Goldman Sachs, AIG and Bank of America held positions in the bottom five.

Rostad referred to another survey by Makovsky + Co that found 96% of marketing officials at leading financial firms invite negative opinion through their own action or inaction.

“Confidence in the amorphous entity known as Wall Street remains relatively low,” Carroll said. “Five years since the crisis, financial firms hold much more capital in terms of quality and quantity. Our industry has long advocated financial reform, including many regulations in the Dodd-Frank Act. We embrace the view that reform alone is not enough to restore trust. Our industry must redouble efforts to demonstrate actions to enhance trust. Without effort, the good intentions of a rule will be lost.”

Carroll listed three strategies that the financial services industry need to enact to regain consumers’ trust.

  1. Expend greater energy on policies that put client interests first
  2. Inform regulatory reform that promotes responsibility
  3. Establish enhanced risk management effort to keep the financial system running smoothly

Carroll referred to AEI’s research, which found consumers recognize that Wall Street is important and makes a contribution to the economy.

“Wall Street is necessary, but what’s hardened so much is the view that is has a different set of values than most people,” Bowman said. “Wall Street is far removed from most Americans.” The AEI paper refers to research from Aspen Institute that found in 2012, 79% of consumers said Wall Street did not share the same values as most Americans. After the financial crash, Harris Interactive found that only a quarter of respondents agreed that people on Wall street are as moral as most Americans.

Bowman said that while there has been no recovery in attitudes toward Wall Street, banks have improved. “Banks recovered in public opinion. Trust is regained slowly, but it can happen. We’ve seen that on two separate occasions,” she said, referring to improvements in public opinion after the savings and loan crisis in the ‘80s. One reason for that, she suggested, is that people are more intimately connected with banks because they interact with them more frequently.

“Business as a whole is quite strong in American public opinion,” Bowman added. Americans are still confident in the free enterprise system. Although they’re a little less confident in capitalism, she suggested that was because it was so closely connected to Wall Street in Americans’ minds.

“One of the key findings [of the Labaton Sucharow research] is that Wall Street faces a serious and growing ethical crisis,” Thomas said. “Misconduct was both common and accepted. Over half of respondents said their competitors were probably breaking the law and 23% said they knew someone in their own firm was doing so.

“The financial services industry has made great strides, starting with the Dodd-Frank Act,” Thomas continued. “Regulation alone cannot fix these problems; policies and procedures don’t get at the heart of the problem. An opportunity for the industry is to work on establishing a culture of integrity. Junior personnel were more likely to be aware of illegal behavior than senior counterparts. There’s an opportunity for a responsible organization to provide more training.”

He noted, too, that the cost to an unethical firm is more than monetary. “If organizations don’t make it a high priority to establish a culture of ethical behavior and internal reporting, the cost will be much higher in monetary terms as well as reputational harm.”

“This is our territory,” Carroll said, “and we need to take a lead role in cleaning it up.” 

Check out 5 Years After Lehman Crash: ‘Dark Times’ Ahead on ThinkAdvisor.