RBC chief John Taft describes long climb for finance industry to regain public trust

It's been a decade of soul-searching for the financial industry. Blamed for the 2008 financial crisis, banks enjoy little public confidence and are paying for it with regulators and with Congress. One banker trying to address the crisis of confidence is John Taft, the CEO of RBC Wealth Management, U.S., and editor of a new book titled "A Force for Good: How Enlightened Finance Can Restore Faith in Capitalism." Taft collected contributions from a group that included Robert Shiller, the Yale economist, and Sheila Bair, former chairwoman of the FDIC. Taft, a great-grandson of President William Howard Taft, sat for a brief interview with the Star Tribune.

Q: Can you describe the moment you first realized the financial industry had a big problem with public trust?

A: I was in the U.S. Capitol talking to members of Congress the day of the Goldman Sachs special committee hearings, and they were burning Wall Street financier figures in effigy on the street outside. That was pretty dramatic evidence of public opinion toward the financial services industry at the time.

Q: Is it all just a misunderstanding? Does the public just not understand the complexity of the financial system?

A: The public definitely doesn't understand financial markets or the financial system. So there's a gap. That's part of it. The other part of it is that financial services firms, going up to and through the financial crisis, didn't live up to society's expectations of the role they should be playing in finance, at least not in the United States. Not all of them.

The largest and most visible firms were challenged in that area, but there are tens of thousands of financial institutions across the country that are — you keep hearing about Wall Street, Main Street — they are Main Street. Community banks, local brokerage firms, local advisory firms. But, as a whole, the industry breached its contract with society.

Q: What is the nature of the breach?

Many people have talked about how trading businesses replaced investment banking and wealth management businesses as the engines of profitability at financial services firms. Trading businesses tend to be more about making money for the firm. Investment banking, asset management, wealth management, tend to be about actually serving real people, real clients in the world. Well, the balance of power shifted. The breach was you're supposed to enable financial growth, you're supposed to serve clients. You're focusing on yourself and look what you've done. You blew the system up being selfish and self-centered and self-referential, that's the fundamental breach. And there was a lot of unethical behavior that went along with that, and in some cases illegal behavior.

Q: You say in the book, "Until we reconnect financial institutions to their mission and purpose — helping real clients achieve their goals and objectives — no amount of legislation or regulation or rule making will enable the financial system to be a consistent, stable provider of societal benefits." Where's the beef? Are you recommending a move away from trading and toward client services?

A: That's one of the ways you can operationalize that. Here's the recipe: Use more beef; use less, I don't know, cognac. One of the ways this is playing out is that client-facing businesses are regaining the driver's seat at most financial institutions, I think.

You've got three ways you can put the financial system back on the rails. One is what we've been talking about, is how do financial institutions and participants internalize the purpose they should be serving in society? That has to do with making sure they understand and stay in touch with their mission and their purpose.

The second is, make sure ethical behavior and norms are present every day. Then you've got the regulators. No question, regulation has been dramatically increased, and more important than increased, sort of updated. Another source of how you get firms to focus on clients is you tell them they have to focus on clients.

Those are all three answers to your question. Where's the beef? In general, people are trying to return the financial system to its proper role. And then you have a lot of people writing about what is the role of finance. Every month I can pull up long thought pieces on that topic, which is good, which is what my most recent book tries to do, is be another contribution to that conversation.

Q: How much is the negative public perception of finance just the air that we're breathing right now, and large sectors of the population won't come around to respecting the role that finance plays?

A: Just think about it in your personal life. If you breach somebody's trust, if you betray somebody, they will respond predictably. They won't trust you. They will be angry at you. They will want to punish you. And it will last a long time. And in the middle of all of that, you will think that they will never feel differently about you.

How do you fix that? You have to behave responsibly, in a consistent way over a long period of time, and if you do that, ultimately it's possible to restore trust. The thing about it is that trust is critical to the proper functioning of the financial system. Trust is critical to economic growth. To the extent trust is compromised, which it has been, it inhibits economic growth, so it's in everybody's interest that we restore the trust between financial markets and the public. But it's been five to seven years since the financial crisis. It could easily be five to seven more before we get back to a level of trust that's optimal, and even then that depends on no more blowups, no more headlines and scandals and betrayals between now and then. So it's a long, arduous process.

Adam Belz • 612-673-4405