Trust Deficit

In a study commissioned by The American College Cary M. Maguire Center for Ethics in Financial Services, researchers spoke to 15 senior executives at top U.S. insurance and asset management companies. 

Most agreed that, in the wake of the global financial crisis, consumers lost trust in financial institutions and professionals. Looking ahead, consumers are demanding that financial institutions: 

• Make meaningful contributions to societal challenges such as climate change. 
• Offer transparency and open communication. 
• Simplify complexity and explain products clearly. 
• Deliver a strong digital experience. 

Unfortunately, even firms that are committed to improving relations and being held accountable have found it hard to rebuild trust in the face of various roadblocks, including: 

• Widespread bias against large financial institutions, which devalues firms’ efforts to improve.
• A tendency to lump financial institutions together irrespective of sector, which obscures individual firms’ progress.
• Short-termism and shareholder pressure to deliver growth, which threaten to undermine long-term, customer-focused initiatives.
• An inability to change the underlying structures of the industry, which leaves firms powerless to control things like independent distributors’ behavior. 

Navigating a Way Forward

Despite the challenges, enhancing consumer trust is a key strategy for financial institutions and professionals that want to thrive in a changing environment (see Table 1). 

Table 1: Emerging Trends Accelerating the Role of Trust as a Practice

By focusing on building trust and delivering the types of products and services that consumers truly want, financial firms can chart a safer path through this changing environment. Greater trust will help firms attract younger consumers, adapt to diversity, deal with competition from tech-driven startups, manage the risks (and enjoy the benefits) of AI, and work more effectively with regulators. 

While building trust may be challenging, for far-sighted firms, the benefits could be huge.

To learn more about how firms can tackle the roadblocks that make trust-building challenging, download the full research report now.

AI Can Support a Better Life Insurance Industry

In the life insurance industry, risk-based underwriting helps insurers price products properly by assessing individuals’ risk profiles and assigning them appropriate premiums. New AI-enabled underwriting tools enhance this process by integrating big data and sophisticated analysis that is beyond the reach of human underwriters. 

These models have the potential to expand access to life insurance products by helping insurers understand new markets and build products tailored to their needs. 

However, the opaque nature of these tools creates the risk that they may unintentionally discriminate against protected classes. 

For example, an AI system may use criminal records data to support underwriting decisions. However, the criminal justice system has a history of bias, imposing harsher penalties on Black and Hispanic perpetrators compared to white offenders committing the same crimes. Thus, the AI system could inadvertently use criminal history as a proxy for race, with discriminatory outcomes.

Seizing the Benefits, Avoiding the Risks 

In work commissioned by The American College Cary M. Maguire Center for Ethics in Financial Services, researchers propose three tactics to help life insurers take advantage of the benefits of AI-enabled underwriting while avoiding its potential pitfalls. 

Start with Trust

Trust is crucial in life insurance, and AI-enabled underwriting can make maintaining trust more difficult. To promote trust: 

• Consider the impact of AI systems on communities. 
• Focus on accountability and ensuring that all stakeholders focus on the higher purpose of life insurance. 
• Tackle problems with “explainability” so that consumers can better understand AI-enabled underwriting decisions.

Corporate Culture is Key

Ultimately, decisions related to technology and AI implementation are no different than other important corporate decisions, and similar processes and approaches are demanded. Corporate decisions should be made within the context of a strong, ethical culture. 

Transparency and openness are key, and leadership should be receptive to feedback. Employees on data science teams should be encouraged to think about ethical issues and speak up when they see problems. 

Above all, human judgment should continue to play a role in evaluating and managing AI-enabled systems.

Industry-wide Standards Can Support Ethical Outcomes

By standardizing legal and regulatory frameworks, life insurers, self-regulatory bodies, and state and federal regulators can help mitigate some of the risks associated with AI-enabled underwriting. Industry-wide standards that fill the gaps in current rules by directly addressing the use of AI would help insurers develop their internal policies and would support audits of AI systems and their outputs. Proper regulation and oversight would help enhance trust in these systems, benefiting both consumers and the life insurance industry. 

To learn more about how the insurance industry can ensure that AI-enabled underwriting enhances life insurance products without increasing discrimination, download the research now.

Insurers increasingly use AI tools to make underwriting decisions and regulators are struggling to keep up with the dangers this poses – especially the risk of embedding discrimination. Is there a framework that could help the industry move forward safely? 

The Problem

Third-party AI systems are making many insurance decisions these days. Using both medical and non-medical information—such as credit profiles and social media activity—these systems categorize consumers and assign them risk profiles. Insurers hope these systems will yield better underwriting and boost profitability. But industry players also worry that these “black box” systems, many of which use proprietary data and algorithms, could fall afoul of the rules against discrimination in underwriting. 

Many states prohibit both discrimination based on protected characteristics like race and proxy discrimination, which occurs when a neutral factor disproportionately affects a protected class. Unfortunately, ensuring that AI models do not breach these rules is difficult. 

A study by Azish Filabi, JD, MA, and Sophia Duffy, JD, CPA at The American College of Financial Services notes that: AI systems can unintentionally result in unfair discrimination in insurance underwriting by using data sources that have a historical bias or act as proxies for protected characteristics, leading to discriminatory outcomes. It can be difficult to assign responsibility for decisions by AI systems—insurers may be ultimately responsible for their products, but they are not always the parties that are most knowledgeable about the technical details of the underwriting system or most able to shape system design. 

Creating a measurable definition of proxy discrimination by AI-enabled underwriting is challenging because insurers can use an underwriting factor if it is related to actual or reasonably anticipated experience and existing standards do not define the threshold for effectiveness of the factor. Therefore, each insurer’s justification for the usage of a factor will be unique. Given the risks posed by AI-enabled underwriting tools and the limitations of current regulatory structures, the insurance industry could face additional regulation and reputational damage if it does not ensure these tools are used responsibly and appropriately. 

The Solution

To address the challenges posed by AI-enabled underwriting, researchers at The College recommend a three-part framework: The establishment of national standards to serve as guardrails for acceptable design and behavior of AI-enabled systems. A certification system that attests that an AI-enabled system was developed in accordance with those standards. Periodic audits of the systems’ output to ensure it operated consistent with those standards. Establishing nationally accepted standards would involve developing guidelines to ensure that AI systems are designed using best practices in system design and actuarial principles. The standards should emphasize: 

• Accuracy: Data used for decision-making should be evaluated for potential bias and errors. 
• Significance to Risk Classification: Inputs should be assessed to determine their relevance to the risk being evaluated. If an input has a causal link to the risk, it is permissible. Otherwise, it should be excluded unless it meets an agreed threshold of actuarial significance and accuracy. 
• Target Outcomes: Target outcomes should be established for algorithm calibration, such as offer rates and acceptance rates among different demographic groups. These targets could be based on a firm's target clientele or insurance rates prior to AI use or a consensus-driven, more inclusive view of insurance availability and payout rates. 

Once the standards are established, both front-end and back-end audits should be used to monitor compliance. On the front end, certification would indicate algorithm developers’ compliance with standardized practices when creating an algorithm. On the back end, audits would review the system for adherence to the standards with respect to its outputs once operational. 

Under the proposed framework, the National Association of Insurance Commissioners (NAIC) would develop the standards in partnership with industry. Uptake would be supported by legal mandates requiring industry players to adopt the standards and an independent self-regulatory body would oversee the certification and audit processes. The proposed framework would fill the gaps in current legislation and empower the insurance industry to self-regulate as it continues to embrace AI-enabled underwriting.

To learn more about how AI is changing insurance and how the industry should respond, download the research now.

In fact, according to industry metrics like the Edelman Trust Barometer, financial services consistently appears as one of the least-trusted sectors in business. 

However, that perception may be changing. As part of its ongoing work to measure the state of public trust in the financial services industry, the American College Cary M. Maguire Center for Ethics in Financial Services used a combination of surveys, focus group discussions, and individual interviews to gather insights from nearly 2,000 consumers about their beliefs and behaviors regarding the financial services industry in early 2021. The results point toward a more encouraging picture of the future than many might think, but one that must be managed for continued success. 

In September 2023, the Center for Ethics' Trust in Financial Services Study was also named a finalist at the 2023 WealthManagement.com Wealthies Awards for Industry Research Provider!

View our insights on the State of Trust in Financial Services.

Trust in Financial Services: An Overview

Despite well-chronicled dynamics and practices that cratered public trust over a decade ago, the Center for Ethics in Financial Services’ research shows that trust in financial services is moderate compared to other service industries: the industry ranked third in a listing of consumers’ seven most-trusted service fields behind healthcare and education, and above such groups as government, telecommunications, and media. 

This improving picture may be reason for optimism, but results showed lingering trust issues remain among certain demographic groups. For example, those with low trust in financial services tend toward the older and younger ends of the age spectrum, including more women than men, are less educated, and have a lower household income. Many of these groups are those who would benefit most from the services the industry can provide. Furthermore, data suggests those with low trust are more likely to have no loans or debt, indicating avoidance of the financial system altogether – another hurdle to overcome. 

Despite this, trust has the potential to be a key enabler of industry change, provided financial companies can understand the feelings and motivations among low-trust demographics and make inroads based on their individual priorities. 

Aligning Values

The Center for Ethics in Financial Services’ survey results suggest today’s consumers of financial services are stuck between a rock and a hard place. They are frustrated in their search for unbiased, trusted information they can use to determine whether they fit with a financial company. They do their homework, but they are often overwhelmed and don’t always know where to turn for education. 

Consumers indicated reasons that drive them to engage with a financial services company. These include a company’s product and service transparency, good customer service, and community involvement. Many consumers also said a company’s treatment of employees and contributions to social justice and diversity, as well as commitment to keeping their personal information private, could influence their decision. 

Additionally, more than half of consumers said they preferred financial products that are easy to use and understand. This preference was so strong it outweighed fees associated with a product or service, the level of risk involved, or guarantees offered by a company. Because of this, firms offering simpler, streamlined products that help consumers consolidate their relationships could help build consumers' confidence about the quality of advice they receive. 

Meeting Consumers Where They Are

The Center’s study showed trust levels also varied among different methods of accessing financial products and services in financial services. In-person access appeared more important to low-trust consumers; for high-trust consumers, the importance of in-person access usually depended on the financial product or amount of money held. 

Using a composite measure called the Demographics of Trust Index™, the Center found survey respondents largely preferred doing business with community banks and credit unions, even though they were the least widely-utilized options in a list along with national banks, investment brokerage firms, and online banking. The results again emphasized the importance many consumers place on having a personal relationship with their financial advisors or institutions from the community level, suggesting a new model the industry at large would be well-served to consider.

Stakeholders in the financial industry—including financial firms, consumers, regulators, and emerging stakeholders like the tech industry and social media—increasingly acknowledge the importance of working together to improve the industry and prevent future crises. Yet their actions do not reflect their pro-stakeholder rhetoric and self-interest remains paramount. 

A study commissioned for the American College Cary M. Maguire Center for Ethics in Financial Services argues that one key reason for stakeholders’ failure to work together may be their problematic beliefs. 

The tables below summarize some of the persistent, negative beliefs that financial system stakeholders hold. Overall, they see one another in competitive, rather than collaborative terms. Consumers and regulators believe that financial firms are motivated by greed and blind to others’ needs, while financial firms and other powerful players see their role in terms of driving growth and generating profit rather than building a system that works for everyone. 

These antagonistic beliefs undermine stakeholder relations. Mutual mistrust and the absence of a sense of shared responsibility mean that stakeholders approach one another with suspicion and try to dominate rather than collaborate. As a result, the financial system remains vulnerable and fails to serve everyone’s interests. 

The current financial system incurs high costs in financial failures and from low trust. Improving the situation will require key stakeholders to rebuild relations and develop a sense of shared destiny. 

Financial firms and professionals can start by: 

• Better understanding the “blind spots” that bias how they perceive their roles and the roles of other actors. 
• Finding overlapping areas of self-interest with other stakeholders to develop a vision of common interest. 
• Creating a roadmap of coordinated action to tackle shared problems across critical areas. 
• Agreeing on more productive behavior patterns, especially toward transparent and timely knowledge and information sharing. 
• Finding new reporting and governance mechanisms to hold each other accountable. 

The study also explores: 

• How financial firms’ competitive orientation may undermine their credibility and informal influence over consumers. 
• Why financial firms prefer to retain power rather than pursuing shared interests, even at the expense of consumer trust and the risk of more regulation. 
• The impact that emerging stakeholders like social media, tech companies, and others may have on traditional financial system dynamics.

Download the White Paper

The research reveals opportunities for financial companies to better connect with and grow trust with consumers by understanding their beliefs and behaviors as these insights can help companies to close gaps in trust and better position themselves for long-term relationships. 

These findings are part of the inaugural Trust in Financial Services Study conducted by the American College Cary M. Maguire Center for Ethics in Financial Services, the only ethics center within an academic institution focusing exclusively on the financial services industry. The study surveyed more than 1,500 U.S. consumers ages 18 and older, with a nationally representative sample based on age, gender, census region, highest level of education achieved, and race/ethnicity. 

“Our Center promotes ethical behavior by offering research and programs that go beyond the rules of market conduct to help individuals and companies be more sensitive to ethical issues and think more critically about solutions for the benefit of society,” said Azish Filabi, executive director of the Center for Ethics in Financial Services and associate professor of ethics at The American College of Financial Services. “We want to be known as the go-to resource on trust, and this research supports our mission to raise the level of ethical behavior in the financial services industry.” 

Simplicity and Ease of Use – Not Knowledge – Wins the Day for Consumers 

The study found three in five (60%) consumers prefer products and services that are easy to understand and use. In fact, consumers’ preference for simplicity outweighed other factors when deciding to use a financial company, including fees associated with the product/services (58%), the level of risk (57%) or guarantees offered by the company (50%). 

Consumers want financial professionals who are upfront, one of the top ten reasons to trust a financial company. A somewhat counterintuitive insight: while the general belief is that consumers are seeking knowledge and skills in a financial professional, they seek simplicity first and foremost. It takes knowledge and skill to simplify complex ideas, yet, from the consumer’s perspective, it’s possible that complexity signals distrust while simplicity – if it’s transparent and truthful – can be an attractive proposition. 

More Trusting of Companies Whose Values Align with Their Own, but Consumers are Willing to Make Tradeoffs 

Nearly seven in 10 (67%) consumers cited “a company’s values are aligned with mine” as a reason for trusting. Understanding consumers’ values can help financial companies connect with and build trust with consumers. 

There is a spectrum of values that influence consumers using a given company (honesty/transparency, customer service, community involvement, treatment of employees, contributions to social justice and diversity as well as practical considerations and fair treatment for all people). Yet consumers must often balance practical considerations with their values when choosing which companies to use, and are willing to make tradeoffs due to: 

• Price 
• Convenience 
• Lack of choice 

“Consumers are cognizant of tradeoffs they must make between ‘practical considerations’ and a company’s alignment with their values,” said Domarina Oshana, PhD, Director of Research and Operations at The American College Center for Ethics in Financial Services. “Sometimes short-term budgetary constraints or maintaining longer-term financial goals take precedence. Much like the scenario that plays out with utility companies, it can be difficult for some consumers to completely steer clear of companies that don’t align with their values, as they may not be able to find the product or service otherwise. Yet, one deal breaker for consumers seems to be instances where they see a company treating people unfairly.” 

Demographics of Trust Index™ Reveals Opportunities for Trust Building 

The financial industry continues to think about how to manage the changing landscape of U.S. demographics. Companies can stand out as trustworthy by better understanding the unique groups they serve. According to the Demographics of Trust Index™: 

• As household income increases, so does trust in all service industries 
• Millennials have the highest levels of trust in all types of financial companies (and higher levels of trust across all service industries compared to other generations) 
• Gen-Z and Boomers+ consumers have lower trust than others in many types of financial companies 
• Consumers of color have higher levels of trust in national banks, online-only banks, and investment app companies compared to White consumers, but similar levels of trust in financial services overall 
• Female consumers have similar levels of trust as male consumers 
• Overall, consumers with low trust in financial services tend to be both older and younger (Gen-Z and Boomers+), female, and less educated and have lower household incomes 
• Low trust consumers tend to trust local institutions 

STUDY METHODOLOGY 

The research methodology for the study included a consumer survey as well as focus groups and in-depth interviews to assess consumer perceptions of trust. Respondents for the consumer survey were asked a number of questions about their beliefs and behaviors to measure trust in financial services. Information for the consumer survey was gathered through an online panel, designed and deployed by an external research partner to The College, with over 1,500 Americans conducted between May 12-June 2, 2021. To qualify for participation in the study, respondents had to be aged 18 and older and live in the US. Two focus groups and five in-depth interviews of consumers aged 18 and older in the U.S. were also conducted to dive deeper into the themes uncovered in the survey and provide context for the quantitative data from the survey. 

The Demographics of Trust Index™ was derived from the consumer survey to track and trend demographics of trust in financial services over time. It is a reliable and valid composite measure summarizing multiple statements in the survey that represent beliefs about trust on privacy and data security, financial integrity, guidance/decision-making, community support, and innovation. Consumers were asked to rate how much they agree with each statement on a 7-point scale (where a 1 means “Strongly Disagree” and a 7 means “Strongly Agree”). Consumers were only asked to rate the types of financial companies they use or are familiar with. The agreement ratings were then converted to a 0-100 scale and averaged to form the index value. 

ABOUT THE AMERICAN COLLEGE OF FINANCIAL SERVICES 

Founded in 1927, The American College of Financial Services is the nation’s largest nonprofit educational institution devoted to financial services professionals. Holding the highest level of academic accreditation, The College has educated over 200,000 professionals across the United States through certificate, designation, and graduate degree programs. Its portfolio of applied knowledge also includes just-in-time learning and consumer financial education programs. The College’s faculty represents some of the foremost thought leaders in the financial services industry. Visit TheAmericanCollege.edu and connect with us on LinkedIn, Twitter, Instagram, Facebook, and YouTube. Discover all the ways you can expand your opportunities with us.

Yet the debate over shareholder primacy versus the stakeholder theory of business in the financial industry persists among analysts and professionals.

This week marks 50 years since publication by The New York Times of the Milton Friedman essay “The Social Responsibility of Business Is to Increase Its Profits.” Reference to this essay has become tantamount to the position that “shareholder primacy” is the cornerstone of American capitalism. The anniversary provides an occasion to reflect on the purpose of business, as well as business ethics in financial services, and how leadership mindsets can impact outcomes for all stakeholders.

I first learned about the Friedman essay when I started teaching at the NYU Stern School of Business in 2015. I was familiar with Friedman the economist, but not Friedman the essayist. At law school, we learned the “business judgment rule,” the principle that the law will defer to the reasonable judgments of the board and management as they make decisions that inevitably require a trade-off between various stakeholders, and these decisions are not considered conflicts of interest. When you ask lawyers about corporate duties, you’ll hear about principles like Duty of Loyalty and Duty of Care, but not about the primacy of a shareholder. Later, studying public policy and economics at the Johns Hopkins School of Advanced International Studies (SAIS), we learned about market failures, not perfect markets. Developing policy rooted in financial ethics requires a focus on how markets fail to deliver to all stakeholders, which enables policymakers to judge appropriate and timely government intervention.

My takeaway was that managers have a duty to shareholders, but it’s not their only or primary duty. One look at the litigation and enforcement dockets against corporations demonstrates how stakeholders can and do advocate for their own recompense in the face of unethical behavior or unlawful corporate action.

The enduring appeal of the theory of shareholder primacy, however, signals that the mindset of business leaders is an important element in their decision-making. How a company balances the interests of their stakeholders while still practicing financial ethics reflects upon their unique governance and leadership structure.

For many business decisions, there are no clear rules or codes of ethics set in stone. On the margins, for certain specific and boundary-setting circumstances, there may be guidance on ethical issues to help us identify the right thing to do – for example, during a merger, many lawyers will likely advise that the board’s role is to manage a process that will yield the highest price for shareholders; or, in the event of bankruptcy, there is a clear waterfall of payments requiring that certain stakeholders (employees, lenders, etc.) be paid before the shareholders, who retain only residual interests. These rules provide a clear hierarchy of order in decision-making. For the large number of day-to-day challenges, however, leaders have the hard job of finding the right balance in the absence of clear ethical standards.

How leaders resolve these inherent ethical issues signals to the financial markets their approach to governance. Viewed through this lens, the rising interest in ESG investing can be seen as an indication that capital markets find financial value in these signals of non-financial behaviors. For instance, in our current economic downturn, how are managers to decide whether to cut dividends to their investors or to lay off workers while weathering the COVID-19 financial crisis? Investors are paying attention to these trade-offs and their long-term impacts.

Friedman’s 1970 essay should be viewed in the context of the times for which he wrote it. As Kurt Andersen of The New York Times writes, Friedman was responding to the surge of support for social justice movements in the late 1960s, and a fear of “big government” controlling business through a socialist agenda.

Similarly, we need to look through the lens of modern-day business and social settings to find opportunities for corporate leadership. While the financial services industry continues to rebuild from the 2008 Global Financial Crisis, it is faced with new social, economic, and ethical issues unfolding from the COVID-19 pandemic. However, the lack of trust in financial services among the general population is an enduring challenge. According to the 2019 Edelman Trust survey, “financial services remains the least trusted sector” they measure. While trust has been improving since 2008, the survey finds that 70% of respondents “expect their financial services leaders to lead on social issues…that make the world a better place.” Income inequality and financial security top the list.

Put in context, the public perception is that growing economic inequality casts a shadow on the reputation of the financial services industry—calling leaders to action. As the current financial crisis unfolds, these questions become particularly critical. The racial economic wealth gap remains persistent. The middle class is shrinking. And extreme weather and natural disaster risks are climbing to the top of the global economic agenda.

The silver lining is that the mindset of business ethics has shifted, and opportunities to embrace stakeholder value as synonymous with shareholder value abound.

Azish Filabi, JD, is Executive Director of the Cary M. Maguire Center for Ethics in Financial Services.