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Dan's new book for millennials, Wealthier: The Investing Field Guide for Millennials, will be published on May 15, 2024, and available on Amazon.
“Power tends to corrupt and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority; still more when you superadd the tendency of the certainty of corruption by authority.”
--Lord Acton
This famous quote, penned by British historian Lord Acton in 1887, has stood the test of time as a warning about the dangers of unchecked authority. Although he was writing to a bishop about the perils of too much power being vested in one individual, his words ring true far beyond the ecclesiastical context.
The idea that power is inherently corrupting has been repeatedly proven throughout history. From politics to business to religion, there are countless examples of individuals who succumb to corruption and abuse their authority.
Examples in the Financial Industry
There is no shortage of examples of power and corruption in the financial services industry:
Bernie Madoff: Madoff was a prominent financier who ran the largest Ponzi scheme in history. As the founder of Bernard L. Madoff Investment Securities LLC, he had unchecked power over his clients' investments. He used this power to deceive investors and regulators, ultimately defrauding his clients of billions of dollars.
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Raj Rajaratnam: Rajaratnam, founder of the Galleon Group hedge fund, was convicted of insider trading in 2011. He used his power and influence to access confidential information, which he used to make illegal trades and manipulate markets for personal gain.
Wells Fargo Scandal: In 2016, Wells Fargo employees were found to have created millions of unauthorized accounts in customers' names to meet aggressive sales targets. This was a systemic abuse of power, driven by a toxic corporate culture prioritizing profits over ethics.
Martin Shkreli: Shkreli, a former hedge fund manager and CEO of Turing Pharmaceuticals, gained notoriety for dramatically raising the price of a life-saving drug by over 5,000%. He also engaged in securities fraud and was eventually convicted and sentenced to prison.
Enron Scandal: The executives at Enron, once a high-flying energy company, abused their power by engaging in fraudulent accounting practices to hide the company's debts and losses. When the deception came to light, it led to the company's collapse and massive losses for investors and employees.
Brian Hunter: Hunter, a trader at Amaranth Advisors, caused the collapse of its affiliated hedge fund after he made risky bets on natural gas prices. His unchecked power to make these trades resulted in a loss of as much as $6 billion, one of the largest trading losses in history.
Check out the SEC’s Litigation Releases. On any given day, you’ll see a litany of actual and alleged misconduct by financial advisors and others engaged in securities fraud.
The Psychology of Power
Why is power so corrupting? Psychologists have long studied this phenomenon, and their research offers some compelling insights.
Power can fundamentally change how we think and behave.
When we feel powerful, we tend to focus on our goals and desires, and less on others' perspectives. We become more optimistic and risk-tolerant, which can lead to reckless decision-making. Our heightened sense of power can lead to stereotyping and prejudice, as it makes us less likely to question our assumptions.
Power can lead to the belief that the rules don't apply to us and that we're entitled to special treatment or exemptions. This is a heady, seductive feeling — and a dangerous one.
A seminal study reached these conclusions about the impact of power:
- It promotes self-righteousness, moral exceptionalism, and hypocrisy.
- It decreases empathy and compassion.
- It promotes disinhibited behavior and overconfidence.
- It promotes unethical behavior and entitlement.
- It promotes aggressive and dehumanizing behavior.
- It sexualizes social interactions.
- It increases the tendency to use “preconscious processing and stereotypical information about others.”
Lord Acton was far ahead of his time.
Power and Financial Advisors
As a financial advisor, you significantly influence your clients' financial lives. They trust your expertise and look to you to guide them in making some of their most important decisions. With this influence comes power.
While most financial advisors start their careers with the best intentions, the allure of power can lead some astray. They may begin recommending products or strategies that, while not outright unethical, primarily boost their revenues rather than their client's bottom line.
They may become less diligent in their research, coasting on their reputation rather than working hard to ensure their advice is genuinely in their client's best interests.
Little by little, the power dynamic can corrupt even the most well-intentioned advisor. It's a slippery slope from putting your interests on par with your clients' to putting your interests first. Once that line is crossed, it becomes easier to justify further transgressions.
Recognize the Warning Signs
How can you guard against the insidious influence of unchecked power? It starts with self-awareness and a commitment to self-reflect. Be alert to red flags in your behavior, such as:
- Feeling that you're above reproach or that your judgment is infallible
- Resenting clients who question your advice or want more explanation
- Recommending products or strategies primarily for your gain
- Letting flattery from clients cloud your objectivity
- Cutting corners on research or due diligence because you're "the expert"
If you slip into any of these patterns, it's time for a serious gut check. Your clients' trust is a privilege, not a right. It must be continually earned through ethical, client-centric conduct.
Maintain the High Road
The antidote to corruption is a steadfast commitment to integrity. This means always putting your client's interests first, even when it's difficult or comes at a personal cost.
It means being transparent about fees, commissions, and potential conflicts of interest. It means owning your mistakes and limitations and being willing to say "I don't know" when appropriate.
Most of all, it means viewing your power not as a perk but as a profound responsibility. Your clients are placing their financial futures in your hands. Treat that trust as if it were a sacred duty.
Dan coaches evidence-based financial advisors on how to convert more prospects into clients. His digital marketing firm is a leading provider of SEO, website design, branding, content marketing, and video production services to financial advisors worldwide.
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