Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 6

Nixon’s Mum

The financial services industry is untrustworthy … that’s how people see it.

A survey of over 3,000 people across 60 countries found that only a third believe their ‘primary investment contact’ acts in their best interests. Only a third! Of course we’d be startled if as many as a third believed their used car dealer acted in their best interests but ironically we in finance and investing need to be trusted more than do used car dealers. Not only is a car dealer’s past performance likely to be a reliable guide to future performance, but used cars can be tested for quality by identifiably independent experts, and one can insure against the risk of lemons.

None of this holds in financial services where the confluence of informational asymmetry and intrinsic uncertainty means quality can never be tested. For instance, half a century of data is famously needed to be confident that skill rather than luck best explained a manager’s outperformance. All we have had is trust, yet the ‘market’ for trust has failed; demand is increasing while supply is decreasing. The World Values Survey asked people in Britain ‘can most people be trusted?’ In 1959, 57% answered ‘yes’, but by 2000 that had collapsed to 31%.

Trust in the entire financial system has been battered by financial crises and bruised by Madoff-style schemes, both of which are too readily dismissed by the few-rotten-apples metaphor designed to comfort us, to distance us from corruption. Yet we all played a part in small but insidious ways. For instance we eternally qualify with the ubiquitous ‘little’, as in ‘we underperformed a little’, the strategy ‘failed to hedge a little’, and the one we all fear, ‘this might hurt a little.’ Weasel words undermine trust inch by inch. Let’s say it like it is. Some language goes further than merely undermining trust. Some destroys it. Listen to private bankers striving to increase their ‘share of wallet.’

Trust might be cautiously restored if people see ethical behaviour as the norm, if they see us in the business behaving ethically. Some argue we shouldn’t try, that ethics inhibits success in commerce, and that it’s too onerous. But where trust is a crucial ingredient of ‘getting to yes’, ethical behaviour is more likely to enhance success. And it isn’t too onerous. Just the opposite because society’s response to poor ethical standards is more regulation. Now that’s onerous.

Trust in financial services could be re-kindled if we practised two easily-stated pragmatic principles.

The Oedipus Principle. In commercial dealings always act and behave as you would in dealing (at arms’ length) with your mother. We may have complex relationships with our mothers, but most would neither take unfair advantage of them nor mislead them in commercial dealings. We wouldn’t lie to them, even though as children we all did.

The Nixon Principle. In commercial dealings always tell the truth, tell it quickly, and tell nothing but the truth. The adverb quickly is crucial. The longer you delay telling clients about screw-ups or misleading statements, the harder it is to come clean and the greater the suspicion of a cover-up, which when discovered permanently destroys trust. Judgement is needed in deciding whether to tell the whole truth. Sometimes not telling the wholetruth can be ethical, as might be the case if a long-short equity hedge fund named its shorts. Almost never are ethical decisions black-and-white, but blurring is no excuse for not exercising ethical judgement.

All principles of government, investment, commerce and ethics are easy to live by in normal times.  Our commitment to them is only tested when we’re under extreme pressure, and we mostly fail.  Suppose your child urgently needs a life-saving operation which you can fund via a sale that is far more likely to close quickly if you don’t alert the buyer to a half-buried escape clause that applies to a guarantee. Will you still hold to the principles of Oedipus and Nixon?

To embed trust in commerce we also need to exorcise the neo-liberal economic rationalist agenda that preaches selfishness as a virtue and justifies it on the grounds that the invisible hand will serve the common interest. Adam Smith knew the limits to his profound and beautiful metaphor; he warned that free markets ineluctably result in collusion and corruption. Financial markets, being “demons of our own design” must be regulated … wisely. Unfortunately wisdom is in short supply.  Would you trust a seller of mortgages regulated by ASIC’s requirement that a credit contract be merely ‘not unsuitable’ for the purchaser? That’s but a slight nudge ahead of caveat emptor.  ‘Most suited’ or ‘the best’, but ‘not unsuitable’?

Exorcism must be brought to bear on Milton Friedman’s rationalist view that a firm’s sole social responsibility is to make (legal) profits. Freidman is doubly wrong. First, a firm’s aim should be to produce goods and services of sufficient quality that people will want to purchase them. Profit is a consequence of production rather than the aim. Once profit becomes the aim, as it has on Wall Street, unethical behaviour becomes readily accepted and resources are directed to accounting trickery rather than to production. Profit as the aim allowed Wall Street to legally sell ‘No-Doc No Income No Job’ negative amortisation mortgages to poor unemployed people (and then to blame them.) Second, were Friedman right, companies would be the only institution in society whose sole constraint is to obey the law. We rightly expect more than that from our schools, our governments, our hospitals, and from each other. We expect them and us to behave considerately, reasonably, ethically – high standards we all fall short of from time-to-time.

 

Dr Jack Gray is a Director at the Paul Woolley Centre for Capital Market Dysfunctionality, Faculty of Business, University of Technology, Sydney, and was recently voted one of the Top 10 most influential academics in the world for institutional investing.

 

RELATED ARTICLES

Does the public hate us?

Accounting may finally be sexy

banner

Most viewed in recent weeks

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

Latest Updates

Shares

Why the ASX may be more expensive than the US market

On every valuation metric, the US appears significantly more expensive than Australia. However, American companies are also much more profitable than ours, which means the ASX may be more overvalued than most think.

Economy

No one holds the government to account on spending

Government spending is out of control and there's little sign that Labor will curb it. We need enforceable rules on spending and an empowered budget office to ensure governments act responsibly with taxpayers money.

Retirement

Why a traditional retirement may be pushed back 25 years

The idea of stopping work during your sixties is a man-made concept from another age. In a world where many jobs are knowledge based and can be done from anywhere, it may no longer make much sense at all.

Shares

The quiet winners of AI competition

The tech giants are in a money-throwing contest to secure AI supremacy and may fall short of high investor expectations. The companies supplying this arms race could offer a more attractive way to play AI adoption.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Infrastructure

Renewable energy investment: gloom or boom?

ESG investing has fallen out of favour with many investors, and Trump's anti-green policies haven't helped. Yet, renewables investment is still surging, which could prove a boon for infrastructure companies.

Investing

The enduring wisdom of John Bogle in five quotes

From buying the whole market to controlling emotions, John Bogle’s legendary advice reminds investors that patience, discipline, and low costs are the keys to investment success in any market environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.