Encouragingly, according to the 2021 Edelman Trust Barometer, business is now the only institution seen as both competent and ethical. That’s right, both competent and ethical. Moreover, business is the most trusted institution of the four studied, which include Non-Governmental Organizations (NGOs), Government, and Media. Remarkably, it is also the only trusted institution with a 61% trust level globally. In 18 of 27 countries, business is more trusted than NGOs (57%), Government (53%), and Media (51%). It is a light of hope in a world too often obscured by mistrust and misinformation. Yet, financial services in particular remains one of the least-trusted industries in business, as measured by Edelman.

Trust is the fuel that enables the financial services industry to effectively provide products and services to clients. If we acknowledge the imperative of trust as necessary for the sustainability of client relationships, I would therefore posit empathy is a main ingredient in that fuel. Companies that brand themselves from a perspective that puts clients’ wants, needs, and dreams before their own, and are able to implement authentic operations to support that brand, are companies that project the image of caring about their clients as humans above all else. The time is ripe for financial services companies to show clients that they “get” them and start to build and sustain trust-based relationships. Demonstrating empathy in those relationships could be one way to get there.

Empathy is a choice to connect with clients. For advisors, this could mean working harder to understand their clients’ feelings, and thereby offer respectful and relevant products and services. In social psychology, the term used to describe the degree of emotional connection between the trustor and trustee is affective trust. Trust is a belief held by the trustor – in this case, the client – in a relationship. Trustworthiness is a characteristic of the trustee, an element of reputation projected by the trustee. Affective trust emphasizes having the trustor’s best interests at heart.

In my review of literature on trust, I discovered some strategies for promoting trustworthiness. When advisors act with care and concern for their clients, they are demonstrating benevolence. Benevolence is a driver of trust and falls under the header of empathy.

Trust has been a topic of research in many disciplines since the 1950s. This has led to a family of trust constructs that are varied and multi-dimensional. While a single, universally-accepted definition of trust does not exist, across disciplines there is widespread agreement that trust is essential for a range of human experiences, including business.

In a study by Sekhon et al. (2014), they posit that the development of trust occurs by focusing on building trustworthiness between the organization and its customers, through utilizing five dimensions of trustworthiness (expertise and competence, communication, concern and benevolence, shared values and integrity, and consistency). Concern and benevolence are jointly the most important factor in the model, as consumers are more likely to perceive a financial organization as trustworthy when the company displays this type of behavior.

Building consumer trust is an opportunity to increase the long-term effectiveness of financial services companies and advance the cause of business ethics. As noted by BlackRock, a global investment manager and technology provider, institutional investors are shifting dollars toward environmental, social, and governance factors as they manage risk at a company. The thinking is that sustainability and trust-based connections to stakeholders drive better returns. Larry Fink, Chairman and Chief Executive Officer, writes, “It is clear that being connected to stakeholders – establishing trust with them and acting with purpose – enables a company to understand and respond to the changes happening in the world.”

An important part of empathy is the ability to trust and be trusted. In my experience working within higher education, one of the research studies I supervised was on the question of what defines high-quality faculty. We categorized these instructors as those who retained and graduated students at the highest levels of excellence. From the study, we learned empathy was the one characteristic that differentiated the highest-performing faculty from all others. We also learned high-performing faculty fueled connection with their students because they built trusting relationships, helping their students navigate academic expectations in the midst of juggling the responsibilities that come with being adult learners, such as full-time work and caregiving for children or aging parents.

Financial services companies might consider the relationship between trust and empathy and executing on strategies that cultivate empathy. A first step could be to follow the examples of companies like JetBlue and Microsoft who, with their empathetic content marketing, have created a connection between clients and their respective brands. As Dr. Brené Brown notes, “Empathy is feeling with people.” It is also about recognizing that connection can make things better.

Nursing scholar Theresa Wiseman, who studied diverse professions where empathy is relevant, wrote about teaching empathy, pointing to the general consensus that empathy is a skill crucial to a service relationship. Inspired by Wiseman’s work, the financial services industry might also consider strategies to cultivate empathetic traits from the inside. Highly knowledgeable and experienced financial advisors could learn to be more empathic.

Empathy is not solely innate. In medicine, for example, studies have shown that physicians can learn to be more empathic to their patients. In turn, their increased empathy also increases patient satisfaction and compliance with treatment recommendations. Moreover, these empathic doctors tended to have patients who showed better treatment outcomes. This would certainly get us closer to what Andrew Bailey noted in his speech: “Trustworthiness demands two things: knowledge and skill; and good intentions and honesty.” Diversity, Equity, and Inclusion (DEI) initiatives could also integrate empathy as a training component.

Where there is empathy, there is trust. For clients to continue to return to companies and discuss sensitive information relating to their finances, developing empathy with those clients may be key to opening the door of consumer trust with the financial services industry. The question is: are financial services companies ready to try?

Domarina Oshana, PhD, is a social scientist and research development professional. She is the Research Director for Corporate Programs for The American College Cary M. Maguire Center for Ethics in Financial Services.

It has been two years since the Business Roundtable’s statement on the purpose of a corporation, which read that companies should be concerned about serving all of their stakeholders, not only their shareholders. This represents a mindset shift in business, consistent with the trends toward “stakeholder capitalism.” It has been especially evident during the global events of the last year and the ongoing pandemic, which have spurred some corporations to step up their philanthropic support and community service.

“Doing well by doing good,” a quote attributed to Benjamin Franklin, is a concept that today articulates how corporations could affect the communities in which they operate, if they run their business with purpose in mind. A related term, “social impact,” describes the intersection between for-profit practices and charitable missions, which can demonstrate measurable positive impact on stakeholders. It is about corporations making the world a better place, helping to improve quality of life while also running their businesses well, and solving big problems while serving humanity in positive ways. In a world that cynically views “business ethics” as an oxymoron, really, what does that look like?  

Grab, Southeast Asia’s ride-hailing company, demonstrates a tangible example of corporate purpose with heart for its stakeholders. In addition to transportation, the company offers food delivery and digital payment services via a mobile app. While the company has had blemishes to grapple with, it is interesting to learn how a focus on social impact led Grab, a transportation tech company, to financial services. They identified and filled a real need for their unbanked and underbanked drivers. The company set up their drivers with bank accounts, thereby, enabling them to receive their paychecks through direct deposit.

Grab’s approach demonstrates a stakeholder-focused program. Why? Because its choice to recognize a stakeholder need and to meet stakeholders where they are illustrates an effort to build trust through affective symmetry. By aligning with its stakeholders’ need, Grab strengthened emotional connection, strengthening trust with their drivers.  At the American College Cary M. Maguire Center for Ethics, our research has also identified that balancing symmetries in relationships is an important element of stakeholder culture within the financial industry. The Relationship Balance Model, developed by our Maguire Fellow in Applied Ethics, Caterina Bulgarella, PhD, helps financial institutions identify trust opportunities and understand how stakeholders use trust as an accountability mechanism in reducing asymmetries and/or creating symmetries in their relationships. When businesses put purpose before profit, they can lead the way in addressing social challenges, while innovating in new products.

For financial institutions, one lesson to learn from Grab’s example is to more proactively identify and act on unmet stakeholder needs. Financial institutions could start by questioning how their actions (or inactions) affect people in their organizations, as well as people impacted by them. This approach flips the typical business case equation, from a traditional view of “what’s in it for the business” to a stakeholder-focused impact analysis, as recently remarked in a commentary for Fortune by Azish Filabi, the Executive Director of the Maguire Center for Ethics.

Client advocacy initiatives that involve working closely with client support teams along with research and analytic teams could improve client experience and provide more value. Through such initiatives, financial institutions may discover first-hand the connection between employee satisfaction and client satisfaction.

Companies can be more stakeholder focused through strategies such as collecting feedback through periodic touchpoints with employees and clients, to learn insights about important elements of the employee and client experience, respectively. For employees, such feedback might raise opportunities for the company to support volunteering in the community or managing life transitions, such as the need for childcare or elder care. As an example of the former, BCG provides employees the opportunity to take a social impact leave of absence for up to 12 months. For clients, listening to experiences highlighted by client support staff and using email to communicate regularly with clients may reveal life changes meriting hardship assistance, such as when a terminal illness affects a family financially. One father shines a light on this crushing financial hardship in his deeply moving guest essay for The New York Times, “I Will Mourn My Daughter Forever. But I Was One of the Lucky Ones.”

While I’m not endorsing any company or their specific approach, I believe financial institutions can use these examples to self-initiate opportunities for purpose-driven innovation. We have all heard the expression, “Be kind – you never know what someone else is going through.” This saying calls forth the intentional practice of empathy. What would society look like if financial institutions operated with a central focus on humanity – unceasingly asking their employees and clients questions such as, “What’s happening in your life right now?” or “What do you need most?” and then audaciously helping to meet those needs. It may be a pipe dream, but I do think financial institutions could act on the insights these types of questions provide to create opportunities that nurture an impact-minded stakeholder culture.

Financial institutions may also consider adopting a framework for connecting their business strategy to quality of life improvements for the betterment of society. Drawing from my own professional experience, what I aspire to in my own research, and that which I’ve helped enable, I suggest considering the spirit of the National Science Foundation’s Broader Impacts (BI) Framework. It is a guide to help social, behavioral, and economic scientists more effectively communicate their projects’ potential benefit to society.  

Leaders in the financial industry might adapt this framework to ask and answer questions such as “Who can our products empower?” “Who benefits from that empowerment?” “What concrete steps can we take to make these broader impacts more likely?”

By thoughtfully considering and articulating the potential broader impacts of financial products and services, the financial industry can advance business and social good. It may also help shift stakeholder mindsets of financial services from an industry perceived as transactional to one that is transformational.

DOMARINA OSHANA: Tell us about your dissertation. What makes you so passionate about researching investor fraud vulnerability, and why did you put your stake in this particular topic?

CHRISTOPHER RAND: Having been a financial planner for over 25 years, I have unfortunately witnessed way too many cases of fraud and attempted fraud. Whether the fraud is a huge pyramid scheme like the Bernie Madoff Ponzi affair, a telemarketer overseas who swindles a senior citizen out of their retirement account, or a family member looking to take advantage of their parents, investors need to be protected.  Financial planners may spend much of their career helping a family plan for and save up a nice retirement nest egg, only to see it destroyed by unscrupulous actors. While it is common to focus on the financial loss victims of fraud experience, we often forget the emotional toll on a fraud victim. They may experience feelings from discouragement to depression over being victimized. While it may not be possible to eliminate all fraud risk for an individual, it is possible to reduce their susceptibility to being a fraud victim.  Investigating ways to make an individual’s financial plan more secure through reducing fraud risk vulnerability is where my interest came from.

DO: What impact do you anticipate your dissertation will have in the financial services industry and/or the field of financial and retirement planning? In what ways do you think it might inform ethical behavior and/or encourage dialogue on ethics in fraud prevention?

CR: This research informs investors and professionals about some of the risks individuals face as it relates to investment fraud vulnerability. The topic of fraud has become more common in trade publications, helping increase advisor awareness. There also seems to be an increase in training by firms on what advisors need to watch out for on topics from elder abuse to email and wire fraud.

While training and education may be an important tool to reduce fraud vulnerability, the topics taught should be fraud-specific. It is not enough to increase an individual’s education level about investing—the new knowledge should include specific ways to identify and prevent fraud. My research revealed a surprising finding: knowledgeable investors, as well as overconfident investors, tend to have an elevated vulnerability to investment fraud risk through exhibiting behaviors and attitudes common in fraud victims. The research defined a knowledgeable investor as an individual who scored better than average on a 10-question investment quiz, and an overconfident investor as someone whose confidence level in their abilities was above average but scored below average on the same quiz. Employees and advisors in financial services likely have a higher financial knowledge than those outside of the financial services industry, yet that knowledge may not be enough to detect and deter fraud for their clients.

The advisor-client relationship is many times centered around trust as the advisor strives to handle the relationship with honesty and transparency. That trusting relationship may place an overconfident investor at a higher degree of risk if an unethical advisor was to mishandle that trust. The overconfident investor may be more likely to overlook items and less likely to do their research. Advisors can be transparent with these vulnerable investors about ways clients can protect themselves from fraud, like using a third-party custodian to hold client assets and being truthful about their work experience and credentials.        

DO: In your dissertation, you found elevated investment fraud risk for knowledgeable investors is suggestive that traditional financial literacy requires modification to include information about fraud risks. How can advisors best communicate and educate investors about fraud prevention and awareness?

CR: Just because an investor is knowledgeable, you cannot assume they are at a lower risk for fraud.  Knowledgeable investors may be at an even higher risk if they believe their knowledge level to be adequate and ignore fraud signals, which they may have paid attention to had they possessed a lower level of confidence.

People learn differently, so it’s best to communicate with the client through the best medium for them and bring up the fraud topic frequently. Overconfident investors are also at a higher risk of fraud vulnerability, and do not likely know they are overconfident. Advisors and employees of firms may be aware of their client’s overconfidence and, armed with the knowledge that the overconfident investor is more vulnerable, they may be able to act as their guardian and help protect their assets held at the firm. The research found overconfident investors to have a high level of confidence in the effectiveness of U.S. financial market regulation and to have a high level of comfort in making investment decisions. These two attitudes indicate an overconfident investor will assume regulation is there to protect them, make their investment decision, and move on. Advisors and firm employees should be on the lookout for attempted fraud, like an email solicitation for money that came from a fraudster, as opposed to the overconfident client.  

DO: How do you explain your dissertation to someone not in your discipline? Why does it matter, and what is the key takeaway you would like to impress upon them?

CR: Investment fraud continues to rise, and all investors are at risk.  Simply increasing your investment fraud knowledge is not sufficient to reduce your vulnerability to investment fraud. Obtaining fraud-specific education is a must to help protect yourself and reduce your vulnerability. Fraudsters will continue to find new and innovative ways to separate you from your hard-saved money. Take the time to educate yourself and keep up with the latest and most pervasive fraud techniques.  

DO: What plans do you have for future research and/or education in fraud prevention and awareness?

CR: Fraud research continues to be limited. A primary research project focused on actual incidents of fraud would be a great way to build on this research and could explore additional attitudes and behaviors that may be common in those victims. That knowledge could provide additional evidence about the impact knowledge and investor confidence has on someone’s investment fraud vulnerability. I hope to publish my findings in a peer-reviewed journal and plan to make myself available to the media to help get the word out about investment fraud vulnerability. I have a unique background that may be of interest to the media now that I have completed the PhD I have taught financial planning courses at U.C. Berkeley and San Diego State University and have over 25 years of experience working as a financial planner.  That unique background may pique consumer media interest and help provide the platform needed to discuss investment fraud vulnerabilities.

DO: How has The American College of Financial Services prepared you to help individuals and companies be more sensitive to ethical issues and think more critically about solutions for the benefit of society?

CR: The process of obtaining a PhD from The College changed how I approach challenges. I think more critically when working on projects, challenging things I assume to be true. Historically, I may have quickly researched an item with maybe one source, whereas now I will typically use multiple sources to confirm if my understanding is accurate.

The future of ESG – integrating environmental, social and governance factors in investing – appears to hinge on the concept of “materiality.”

Securities and financial regulators in the U.S. are debating whether and how to guide the disclosure of information relating to corporate ESG activities. European regulators have already taken action, providing guidance through the EU Non-financial Reporting Directive and the Sustainable Finance Disclosure Regulation, among a number of other rules. For the U.S. SEC, if they are to mandate disclosure of certain corporate activities relating to ESG, an analysis of whether those items are “material” to a reasonable investor has become the analytical lynchpin.

Yet, the definition of materiality is and always has been slippery. Current law appears to require, at a minimum, that companies shall disclose all matters, including ESG matters, that are material to a reasonable investor. What constitutes “material,” “reasonable,” and even at times “investor” isn’t always clear.

Regulators are important to the durability of ESG as an investment strategy because mandatory rules or guidance can help mitigate greenwashing, pushing companies to ensure that their communications, reports, and other formalized disclosures accurately reflect their actual business practices and strategies. Moreover, investors will be able to access comparable data about the intangibles in business, sometimes called non-financial behavior, which will help them differentiate among companies’ abilities to manage these emerging risks.

What’s at stake is whether advocates for ESG can provide a defensible rationale for why activities or decisions that used to be considered externalities in business are indeed issues that companies should be responsible for in their own operations. These externalities include environmental issues like greenhouse gas emissions, as well as labor rights and fair wages, among a host of other topics. Many of these areas are not directly regulated on the substance, and therefore securities regulation could impose duties above and beyond existing laws.

Employee satisfaction is a good example in this context. While historically companies considered it nice to have satisfied employees – a happy worker can be a harder worker – labor was primarily viewed as fungible and secondary to other strategic assets. Companies today, however, increasingly view employee retention as a key priority. Even before the pandemic’s impact on tight labor markets, competition for qualified workers was on the rise. Thus, the salient question for corporate disclosure is whether employee satisfaction and retention are “material” to business operations, as has been demonstrated by academic research.

Despite evidence of the link between employee satisfaction and company performance, when it comes to human capital disclosures, few companies disclose meaningful information to satisfy investor needs. Some will cite practices such as their employee surveys or corporate values statements about respect and compassion. But this hasn’t satisfied investors, who continue to ask for more specificity. The information they seek is arguably not so onerous. The Human Capital Management Coalition, a cooperative effort led by a number of investors and asset managers, has boiled it down to four foundational reporting elements, such as the total number of employees (including independent contractors), employee turnover/retention rate, the total cost of the workforce, and diversity data.

Among the SEC Commissioners who have recently opined on materiality, Commissioner Pierce has made the point that there isn’t a need for additional SEC rules on this topic. She indicates that “if ESG opportunities are driving management decision-making, our existing disclosure rules also pull those in.” Others, such as past Commissioner Roisman have also indicated his view that materiality should be the “touchstone” for additional disclosure guidance from the SEC, but questions whether the market is mature enough for SEC guidance to meaningfully address needs beyond the information already available.

This view, that material ESG information from corporate issuers is already mandated, seems to be accurate in principle. For example, Regulation S-K requires that the company disclose its sources of raw materials, its competitive position, or pending legal proceedings, other than routine litigation. Additionally, the 2010 SEC Guidance Regarding Disclosure Relating to Climate Change should have helped address some gaps relating to whether and how environmental and climate matters are material risks for investors.

Commissioner Lee, however, believes that it’s a myth that the securities law imposes a spontaneous obligation on companies to disclose all ESG matters, or indeed all general matters material to investors. She advocates that the market needs guidance relating to ESG matters such as climate change and human capital management because “there is no general requirement under the securities laws to reveal all material information.” Moreover, even when there is a duty to disclose a specific item, business managers and their lawyers and auditors must judge what rises to the definition of materiality. Thus, further guidance on these emerging risks is warranted.

The Department of Labor (DOL) proposals on ERISA plan fiduciary’s responsibilities with respect to ESG also suggests that there is a lack of clarity among market participants. The October 2021 DOL proposed regulations state the Department’s view that “in many instances … an evaluation of the economic effects of climate change on the particular investment or investment course of action” is required. This could be interpreted as a requirement that the impact of climate change on all plan assets be calculated and considered. The DOL has made it clear that use of plan assets to further political and social causes is prohibited, thus requiring that any analysis be limited to financially material impact.

Even if there were consensus that mandatory disclosure of material ESG risks is warranted, the concept of materiality can prove elusive. The prevailing SEC definition, which has endured since a U.S. Supreme Court decision from the 1970s, is more of a general principle rather than a specific requirement. The principle is that managers should disclose information if there is “a substantial likelihood” that it “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”

Moreover, there are emerging qualifiers around materiality today, such as economic materiality, qualitative materiality, double materiality, and dynamic materiality. Some, like economic materiality, assess impact of a matter on the company’s financial situation, while double materiality considers effects both on the company as well as on people and the planet. The latter concept of double materiality has been embedded into the EU Non-financial Reporting Directive, which established principles for reporting of corporate sustainability information in Europe. In addition, ESG is an umbrella for a number of disparate issues ranging from human rights to labor rights to climate change, not all of which can be consistently boiled down to quantitative and material risk.

What’s clear is that investors seek more decision-useful information that could serve as leading indicators of whether a management team has a good grip on the uncertain future ahead. Whether those environmental and social challenges can be refracted through the lens of materiality remains on the U.S. regulatory agenda for the time being.

On March 5, 2022, we had the privilege of presenting at the National Council of Insurance Legislators (NCOIL) Spring Meeting relating to the challenges of regulating artificial intelligence (AI)-enabled underwriting for life insurance. There’s been an increase in the use of AI in various insurance processes, including marketing, risk classification, and underwriting. As we’ve written before, these developments can create new opportunities for the industry, including increased access and improving pricing for consumers. However, they also create risks—particularly with respect to discrimination.

NCOIL is an organization comprised of legislators serving on state insurance and financial institutions committees around the U.S. In addition to serving as an educational forum for policymakers and the public on these topics, they write model laws on emerging topics from which States can benefit. We presented to the Financial Services and Multi-Lines Issues Committee, presided over by Vice-Chair Jim Dunnigan—a member of the Utah House of Representatives.

Our presentation was based on a paper we recently published in the NAIC Journal of Insurance Regulation, AI-Enabled Underwriting Brings New Challenges for Life Insurance: Policy and Regulatory Considerations. Based on our research, we proposed in the paper a multi-pronged governance approach to address the novel data sources, systems, and related risks of AI-driven insurance systems.

The first prong is to establish industry standards (derived from actuarial best practices) that are calibrated to the algorithm risks associated with the process. For instance, these standards could address accuracy in the data, the level of actuarial significance expected for data input, and related outcomes measures for how an algorithm performs. Prongs two and three of the governance framework require testing of the algorithm vis-à-vis the standards created. We believe the algorithm should be tested thoroughly, and that it should be certified to adhere to the agreed-upon standards before it is deployed. After it has been in use for a period of time, it should again be tested to determine whether it performed as expected.

A number of States have already addressed AI-enabled underwriting in insurance. Colorado passed an act in 2021 mandating that the state’s Insurance Commissioner establish rules requiring insurers to demonstrate technology, such as algorithms and predictive models, don’t unfairly discriminate based on race, color, national or ethnic origin, or a number of other protected categories. In Rhode Island, the state’s House of Representatives is considering a similar law that prohibits unfair discrimination in insurance processes when using external data sources or predictive modeling and algorithms.  

The New York Department of Financial Services also addressed this topic in 2019 through a Circular Letter that expressly prohibited using criteria for underwriting purposes unless the insurer can establish the approach is not unfairly discriminatory pursuant to existing rules.

Our presentation was one of several sessions related to the impact of technology and related regulation on the insurance industry, demonstrating NCOIL’s commitment to lead regulatory efforts in this area. We are proud to have been a part of the discussion and look forward to continuing our work.

Specifically, the group tackled the question of trust in financial services and what businesses can do to earn the trust of consumers. Also discussed were ongoing topics of interest such as DEI and the rise of ESG investing.

Read the Full 2022 Forum Report