The financial services industry is the least trusted sector in the UK.
A 2014 PWC study found that only 12% of people trusted their asset manager, 15% trusted their
investment bank, and 28% trusted their financial advisor. These numbers pale in comparison to the
79% of people who trust NHS nurses, 76% who trust GPs, and 53% who trust the police. An additional
2018 Trustpilot survey found that only 44% of retail investors believed their manager had generated
returns similar to or better than their benchmark, and less than 50% believed managers fully
disclosed their fees.
Following a significant industry spend in advertising and PR in 2019, the Edelman Trust Barometer
found financial services to be the most untrusted sector out of all—a woeful state of affairs against a
10-year bull market in stocks and bonds.
It cannot be denied that trust in the industry should be so much higher and, if trust really is so low,
how did we get here?
You could make the case that trust has been eroded by the 2008 financial crash, or by the intensive
negative press coverage following Neil Woodford’s demise.
There might, however, be a more subtle explanation, and it has something to do with the fact that
bees don’t like liars.
Pollination is a mutual process which benefits both parties. Because many plants cannot pollinate
without bees, they produce nectar to encourage the bees to visit their flowers and that nectar in turn
feeds the bee’s entire colony—a mutually beneficial exchange. The bee places a degree of trust in the
plant that there is indeed a nectar source worth landing for and that the plants can, so to speak, be
trusted to keep producing a reliable nectar source worth coming back for.
It is in the best interest of the plant to stand out from the others, so they produce stunning flowers to
gain the bee’s attention. The bee knows equally that it is costly for the plant to produce such a
flower—it makes them visible to hungry herbivores—therefore they assume that only plants with a
nectar source will go to the effort of advertising with a flower. The plant’s job is to say, “Look at me, if
I’ve wasted all of this energy to produce a bright flower bud, my nectar source must be pretty good”.
Scientists call this signalling theory: the process by which organisms use signals to communicate
between one another. The plant knows that if it produces an amazing flower as a signal it will attract
the bees; the bees know that if the plant has gone to the effort to produce an extravagant flower, the
nectar source must be worth visiting.
Corruption exists even in the plant world, however, and two types of signalling exist: honest or
dishonest. Honest signalling occurs when the information signalled is legitimate. If the plant produces
a stunning flower and the bee is rewarded with nectar, that’s an honest signal. Dishonest signalling
occurs when the information signalled is false. For example, if a plant produces a stunning flower but
offers no nectar for the bee, that’s a dishonest signal and the bee will incur a cost for no reward.
Faking reciprocity can be a useful tactic because the plant doesn’t have to waste the energy required
to produce the nectar but still has the opportunity to be pollinated.
Around one third of orchid plants engage in such dishonest signalling—some even produce flowers
which mimic the appearance and smell of female insect genitalia—to entice the bees in without
offering any legitimate reward while using the bee for pollination. You will never trust your garden
again!
The clever bees soon spot that they are pollinating the plants for no reward and so choose other
flowers instead. This means the only plants which benefit from dishonest signals are those playing
the short-term game, which is why ‘dishonest’ species of orchids only flourish briefly at the start of
every season.
In fact, dishonest signalling is a terrible long-term tactic because it erodes the trust of the bees and
eventually undermines the integrity of the whole pollination system. If there were too much
dishonest signalling, the plant species would die out—as many orchid species do.
What makes signalling theory so fascinating is the fact that all organisms do it—including humans. We
might spend money on a fancy sports car or buy expensive jewellery as gifts, but what we are really
saying is, “If I can waste resources on this extravagance and still be okay, then I must be pretty fit
genetically”.
A similar dynamic is at play when brands advertise to us. There is an outward signal indicating
the existence of a product and we instinctively assume that the quality of the advertisement is in
direct proportion to the quality of the product. We know that advertising is expensive so, just like the
bees, we think that if a company has gone to such costly lengths to advertise a product—to produce a
flower—then that product must be worth buying. Think of high-end fashion shows.
Investment banks and asset managers are no different when they promote a product to the investor.
The problem here is that there is a large incentive to play the orchid game: those which extravagantly
promote their products as offering farfetched benefits will collect large up-front fees in the process,
even if nothing ultimately materializes for the investor—a brilliant tactic for those who, like the
orchids, are prepared to sacrifice long-term trust for the short-term benefit found in advertising a
source of nectar that in fact doesn’t exist.
Big problems arise when too large a proportion of the organisms within a system engage in dishonest
signalling; for if every flower plays the orchids’ dishonest game, the bees will soon learn to distrust,
and the entire plant species will die out.
There is every reason to believe that the ubiquity of dishonest signalling within the finance industry
has contributed in no small way to the lack of trust the general population has in their fund manager,
a lack of trust between professional investors and sell-side analysts, and so on. If the consumer
believes that every option available is not designed to be reciprocal but rather to deceive then it is no
wonder that for example 88% of us don’t trust our asset manager.
There may be a warning for the finance industry in the wise bees who, with each passing year,
become more picky pollinators around those orchids that produce no real substance.
Matthew S. Machin