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If we agree that trust and confidence are indispensable ingredients for a truly value-adding private banking industry to flourish, how, then, can we build trust to the required level?

Before we elaborate on this question, we first need to define the concept of trust. For that we refer to Maister, Green, and Galford, who define trust in their bestselling book, The Trusted Advisor,4 as the result of credibility times reliability times intimacy, divided by self-interest:

1. Credibility, simply put, refers to perceived competence. Competence judgments depend on content expertise – qualifications, experience, and so on – and presence, meaning how we look, act, react, and talk about our content. An impactful way to convey credibility is to demonstrate that you understand your clients’ needs better than they do.

2. Reliability is about whether clients think you are dependable and can be trusted to behave in consistent ways. Judgments on reliability are strongly affected by the number of times you interact with a private banker: We tend to trust the people we know well.

3. Intimacy refers to the willingness and openness to talk about personal, difficult, and sensitive issues.

4. Self-Interest (or self-orientation) refers to the perceived level of care: The more a private banker demonstrates that he really cares about the client, the lower his perceived self-orientation or self-interest.

Agreeing that these are the four ingredients of trustworthiness, how can we build and develop trust?

Following a frequently used typology of trust, we identify three levels of trust:5

1. Deterrence-based trust

2. Knowledge-based trust

3. Identity-based trust

Deterrence-Based Trust

Deterrence-based, or rule-based, trust is the most fundamental, basic level of trust. It means that the behavior of other people is to a large extent predictable thanks to rules and regulations. The likelihood that the other abides by the rules is high due to the anticipated repercussions of not complying.

With regard to private banking, the regulator is the main actor when it comes to increasing deterrence-based trust levels. In almost every jurisdiction, often in an internationally coordinated fashion, the regulator has indeed taken firm steps in an effort to regain the confidence that was lost by the financial crisis. Therefore the focus has been very much on minimizing conflicts of interests and increasing quality.

This can be highlighted by a few examples:

● In most jurisdictions, the bonus structure has been scrutinized. It is no longer deemed acceptable that a private banker who generates significant revenues by taking excessive risks in his clients’ portfolios be rewarded with a large bonus.

● Private bankers have to document why they have given their clients certain advice. This is to ensure that there exists a proper trail, proving that the private banker provides suitable advice (i.e., advice in line with the recorded risk appetite of the client), as well as advice that aims to serve the best interests of the client (e.g., MiFID II).

● In many jurisdictions, full price transparency has been enforced. In some jurisdictions, hidden provisions (e.g., kickback fees from fund managers) are now prohibited. Price transparency enables clients to understand the private banker’s interest in the products and services offered (e.g., MiFID II).

● Private bankers have to make much more effort to explain the risks of their products and services to their clients as well as to ensure that their clients understand these risks. These risk explanations have to be recorded, either through voice-log or in writing.

● In many jurisdictions, individual private bankers are forced to meet certain minimum certification requirements, followed by an obligation to continuously develop their knowledge and skill base. This is to ensure that the overall professional standards of the industry are sufficient to allow the public to rely on the services of the regulated and licensed private bankers.

● In some jurisdictions, private bankers have to pledge a professional oath, declaring that at all times they will place the interests of their clients above their own interest.

● As known cases of internal fraud cause great harm to the private banking industry as a whole, regulators have enforced more explicit directions in an effort to reduce internal fraud through guidelines, rules, and regulations.

● To bolster the soundness of banks, they are forced to hold more and better-quality capital. A greater loss-absorbing capacity should provide greater confidence in the ability of banks to survive periods of stress, whenever they occur (e.g., Basel III).

The regulators have responded to the financial crisis with great resolve. The public may expect the banks to implement all the new rules and regulations, as otherwise substantial penalties may be imposed on the banks or even their license to conduct their business may be at stake. This is why we consider this “deterrence-based” trust: Banks will comply out of fear for the consequences of not complying.

In a way, this is a negative way to foster trust, which to a certain extent explains – together with the high levels of skepticism of the general public – why the morale in the private banking industry has been low since the crisis in 2008.

A second important contributor to higher levels of deterrence-based trust is the legal system. The more the public can rely on the courts that private bankers will be disciplined in case clients are victims of fraudulent, insincere, and (blatantly) incompetent behavior, the higher the public expectation that private bankers will undertake all possible endeavors to provide a fair, honest, and high-value-adding service.

Knowledge-Based Trust

The second level of trust is knowledge-based trust. The idea is that trust increases with the increase in knowledge about the other. In other words, the more knowledge you have about the other party, the better you know what you may – and may not – expect.

The main actor with regard to the development of knowledge-based trust is the client. The importance of this trust level is illustrated by the results of the previously mentioned 2013 Edelman Trust Barometer (see footnote 3), where it appears that the informed public scores higher on trusting the financial services industry than the general population.

The main benefit of increasing knowledge about private banking and the added value that a private banker is supposed to deliver is that it improves your ability to assess the credibility of potential service providers, thus reducing the overall time needed to develop a trusted relationship. As an aside, it is appealing and morale-boosting for professionals to work with informed clients, which further improves the overall service levels.

It might sound somewhat unfair: The client is the main victim of the trust and confidentiality crisis in the financial services sector, so why would we expect the client to work to help restore this trust and to contribute to boosting the morale in the industry? This is a good question, and one that forces us to repeat: because it is in the best, personal interest of clients that they are able to have a high level of confidence and trust in a passionate, highly motivated financial services industry, as this sector does have the capability to deliver high-level, high-value-adding services.

Identity-Based Trust

The final level of trust concerns identity-based trust. This is the level where you dare to become vulnerable, knowing that the other party won’t take advantage of you. This type of trust takes time to develop. During that time, the other party has to demonstrate a consistent ambition to be honest, fair, responsible, and transparent.

The main actor “responsible” for developing higher levels of identity-based trust is the financial services sector itself: no more bank scandals; a problem-solving attitude instead of a narrow product focus; no hidden charges or fine print. The private banking industry has to consistently demonstrate it has a sincere resolve to accept its fiduciary responsibility, which refers to the acceptance that the interests of clients must never be compromised by the self-interest of the private banker. In the words of The Trusted Advisor, private bankers can contribute to increasing trust levels by higher levels of credibility, reliability, and intimacy, and by reducing the level of self-orientation.

Table 1.1 combines the three levels of trust with the four ingredients of trust in a single table.

Table 1.1 Three Levels and Four Ingredients of Trust