The Age of Financial Secrecy Is Ending

Large, monolithic organizations are no longer required to make a big impact upon society, culture and the markets either. Small groups of committed people, armed with social media skill, can excel, Dennett and Roy write, “at the kind of fast, open, responsive communication the new transparency demands.” Indeed, as “the pressures of mutual transparency increase, we will either witness the evolution of novel organizational arrangements that are far more decentralized than today’s large organizations, or we will find that Darwinian pressures select for smaller organizations, heralding an era of ‘too big to succeed’.”

This new era is a reality, whatever one thinks of its likely features, benefits, problems and consequences. However, as Dennett and Roy make plain, there can be no denying that this “new transparency will lead to a … proliferation of tools and techniques for information warfare: campaigns to discredit sources, preemptive strikes, stings, and more.” Misinformation and exposure will remain constant threats.

Transparency can be a two-edged sword, of course. Secrecy can be dangerous indeed, but it is sometimes necessary. Businesses have an interest in protecting what is truly proprietary. One of the fundamental insights of game theory is the need for certain secrets to be kept if success is to be achieved.

The financial services industry has been particularly adept at thwarting transparency with respect to its goals, products and processes, keeping customers uninformed or misinformed about products and services. As a consequence, we feature money management strategies that don’t work, products with hidden and excessive fees, and needless, often counterproductive, complexity. We avoid being really accountable to our customers. We push what is easily sold and what pays the most instead of what might actually work. We are not anxious to communicate clearly, thoroughly and accurately.

We talk a good game about serving our clients’ interests, but the key goals still generally remain market share, revenue enhancement and the limitation of liability. Our key tool is still misinformation, delivered by snail mail whenever possible. Efforts to adapt to the new digital transparency with consumer-friendly approaches and strategies are sure to be opposed at every turn by entrenched interests. But as Joel Brenner, former senior counsel at the National Security Agency, noted with respect to the sudden shift in the agency’s operating environment (post Snowden): “Very few things will be secret anymore, and those things which are kept secret won’t stay secret very long.”

In the financial services industry, there is precious little that ought to remain secret. Instead of trying to maintain the self-serving secrecy that has dominated our industry for so long, especially because such secrets will keep getting exposed sooner and sooner, the key to our longer-term survival will be to remake who we are and what we do to serve clients in a transparent future. That will mean true transparency—not the faux-transparency (think “disclosure”) our industry uses to protect its own interests. It will mean clearly and fully articulating what we do and why there are (data-based) reasons to think we can accomplish what ought to be accomplished. It will mean an honest appraisal of our fees and their justification. It will mean serving our clients’ interests instead of our own. It will mean more truth-telling and less sales pitch.

This new paradigm won’t be ushered in overnight. The Cambrian “explosion” still took at least 10 million years. But make no mistake, the change is inevitable. Our choice is whether to delay, avoid and obfuscate to protect the status quo for as long as we can or to create new strategies, products, and structures that will survive and thrive in a new and fully transparent financial world.

With (half-hearted) apologies to James Brown, everybody uses what they got to get what they want. People will remain self-interested as long as there are people. But thanks to the transparency offered by digital media, what the financial services industry’s got to work with is much less and much less potent than it used to be. We can still pull on the hot pants, but we don’t look nearly as good as we used to. Maybe we should try on some new clothes instead.