The Trust Economy

Trust is, and always has been, at the core of the economy. For hundreds of years, that trust has been tested and
reinforced, and it's now more important than ever.

Illustrations by Jamie Jones

INTRODUCTION

FROM THE FIRST BARTER OF GOODS, every exchange of value has rested on a foundation of trust.
Globalization and new technology have led to a tangle of increasingly complex financial products and
investment tools, making the trust of investors ever more reliant on the transparency, accountability, and high
standards of investment advisors.

What follows are timelines of market changes in investing, accountability, and technology that have continually
challenged investor trust throughout history and helped lead to the rise of specialized professionals that can help
investors navigate those changes. Guidelines for responsible professional behavior, such as the fiduciary
standard, which requires certain types of financial advisors to act always in the best interests of their clients,
also developed to help reinforce investor trust.

Timelines of Trust One of Three

Investing

AS INVESTING HAS GROWN MORE COMPLEX OVER TIME, investors have increasingly sought out
second, third, and fourth opinions from their circles. For many of todays individual investors, that means
turning to trusted sources, such as family, friends, or professionals like independent Registered Investment
Advisors (RIAs), who are held to the fiduciary standard. But even from its first iterations, investment has
included an element of risk, and investors have leaned on the actions and advice of other parties to help guide
and reassure them. In the following landmark moments in investing, investors and advisors learned lasting
lessons about the role of trust.
In The Years 1000-1500

Trust becomes money

SOME OF THE FIRST BASIC FORMS OF INVESTING emerge when towns develop along international
trade routes. In these towns, people with specialized skillsblacksmiths and stonemasons, for examplebegin
trusting each other with trade secrets and pooling their money, in part to help poorer members in times of need
or to invest in new tools or assets they could share. Early merchant groups follow a similar approach, sharing
local economic information and business leads, investing in each other. With these circles of influence forming,
people work and trade with those whose insights and integrity they trust, and everyone benefits as a result.

Those towns become cities whose financial power builds on itself. By the mid-14th century, as the Catholic
church relaxes its regulations on money-lending, banking houses flourish across Italy, and loans become
commonplace market tools that transform personal trust into institutional strength. Loaning and sharing money
becomes commonplace, but it also means that people need a way to ensure their trust in their financial
collaborators.

In The Year 1792

Opening of the New York Stock Exchange

AS THE 18TH CENTURY DRAWS TO A CLOSE, financial institutions are formal, established, and clustered
in cities. Even in the early United States, everyday commodities like wheat and tobacco are available for
investing and trading, and like their European predecessors, early American brokers find it necessary to form
circles of trust. Twenty-four brokers bank on each other by signing the Buttonwood Agreement of 1792,
agreeing to give preference to each other in trading and making themselves less vulnerable to speculation and
manipulation. Their agreement leads to the New York Stock Exchange, which becomes the organizations
official name in 1863, a distinct space for trading and investing in stock where everyone must play by the same
rules.

Like its founding document, the NYSE is an acknowledgment that sound investing requires a structure, a set of
binding rules, and measures to secure the markets against fraudulent or otherwise illicit trading. The Wall Street
crash of 1929, which destroys the assets of both investors and institutions, also demonstrates the need to set a
high standard of professional care on the part of advisors towards their clients.
In The Year 1940

The Investment Advisers Act

THE SIGNERS OF THE BUTTONWOOD AGREEMENT would have been struck dumb by 20th-century
markets, where increasingly complex forms of investing and waves of individual investors create the need for a
new profession of experts to intermediate between them. New Deal legislation had addressed some of the
causes of the still-fresh Great Depression. But when defense spending begins to revive markets and the
economy in the run-up to World War II, the new Securities and Exchange Commission decides that financial
advisors, to meet the standard of trust that everyday investors needed, required top-down regulation considering
their rising popularity.

The result is the Investment Advisers Act of 1940, which imposes a dutyor fiduciary standardon
investment advisors to act always in the best interests of their clients, and not to maximize their own profit. It
also requires them to register with the SEC, establishing the bona fides of the independent Registered
Investment Advisor and a new foundation of trust and transparency for individual investors.

INVESTING TRENDSThe number of financial advisors will grow by 32 percent between 2010 and
2020.FROM THE BUREAU OF LABOR STATISTICS
In The Year 2008

The Great Recession

THE ECONOMIC MELTDOWN OF 2007 proves that such trust and transparency is needed from more than
just advisors. A lack of broader market transparency combines with an explosion in dubious, dazzlingly
complex financial instruments, particularly in the mortgage and housing markets, to enable a global depression.
As they had almost 80 years before, powerful financial institutions collapse, taking major corporations and
thousands of small businesses with them. Many millions of U.S. citizens lose their homes and their jobs, while
individual investors watch their holdings plummet in value.

The Great Recession reminds us that enormous profits can corrupt the trust that underpins markets, that even the
largest financial firms can be led by momentary success to suspend their better judgment. For good reason,
people withdraw their trustand their moneyfrom the markets in 2007, and huge injections of public money
are required to save some of Americas critical industries. A wave of new regulation was introduced in an effort
to steady the economy and restore faith between investors and financial institutions.

In The Year 2017

The Present Day

THOUGH REGULATORY REFORM HAS HELPED BOOST PUBLIC CONFIDENCE IN MARKETS, the
financial landscape continues to shift. Breathtaking advances in science and technology, the disruption of legacy
institutions by ingenious start-ups, and the global connectivity of economies and markets: All are challenges to
the expertise and agility of financial advisors. Investors are more aware than ever that they need advice from
people they can wholly trust.

Demand for that advice continues to grow. The Bureau of Labor Statistics predicts that the number of financial
advisors will grow by 32 percent between 2010 and 2020, and the Charles Schwab 2015 RIA Benchmarking
Study found that RIAs are not only growing their client base, but retaining their pre-existing clients at a rate of
97 percent. New policies are addressing the practices that led to the recession, and investors need to make
informed decisions now more than ever. However uncertain policy may be, investors are keeping trust at the
heart of their financial relationships.

Timelines of Trust Two of Three

Accountability

FOR EVERY MOVE A POTENTIAL INVESTOR PLANS TO MAKE, they deserve a standard of reliability
and transparency. Whether seeking sound judgment from an advisor or stability from an institution, an investor
should be able to trust that their assets are secure and being used responsibly. With roots in ancient Babylonia
but a firm foothold in the modern-day regulatory matrix, accountability allows investors to keep tabs on their
assetsand history has made clear that there are consequences when it is absent.

In The Year 1754 BC

Code of Hammurabi

THE BABYLONIAN RULER HAMMURABI accompanies his eponymous code of nearly 300 laws with the
declaration that he is bringing prosperity to the people forever. His code emphasizes integrity throughout and
specifically requires it in financial exchanges. For example: If any one give another silver, gold, or anything
else to keep, he shall show everything to some witness, draw up a contract, and then hand it over for
safekeeping. Another injunction pertains to agents in the purchase of goods: If a merchant entrust money to
an agent...and the broker suffer a loss in the place to which he goes, he shall make good the capital to the
merchant. By demanding honesty and accountability, Hammurabis code sets an early cornerstone of financial
regulation, one that would support and inspire market stability for the next four thousand years.
In The Year 1550-1600

Joint-Stock Companies

HAMMURABIS IDEA OF WRITTEN CONTRACTS would still come in handy a few thousand years later, as
exploration and trade in the New World become more commonplace and costly enough to need outside
investment and funding. Enter the joint-stock company, in which multiple investors could acquire stock
certificates of one company and pool assets toward an agreed-upon profit goal and keep watch on their common
investment. Joint-stock companies are some of the first companies to be eligible for royal charters, which
declare the Crowns faith in an organizations success and allow for incorporated bodies to be formed.

Entering a joint-stock operation means that responsibility is divided amongst stockholders, and that if any
individual acts irresponsibly, the rest know. It also means that if the company accumulates any debts that the
company itself cant pay, the shareholders are accountable for making those payments.

In The Year 1929

The Great Depression

BUT WHAT IF A MARKET-WIDE PLUNGE IS TOO SIGNIFICANT TO PAY OFF? The historic crash of
the U.S. stock market in October 1929 serves as a wakeup call to investors and institutions alike, that a top-
down mandate of accountability is necessary. Millionaire investor Clarence Hatry is symptomatic: He issues
forged stock certificates and faked credit in order to receive a loan of a million dollars. When he is found out,
all of the Hatry groups shares are suspended. The Wall Street crash happens the following month.

There are other causes, of course, but the market panic that followsin todays currency a fall of 89 percent of
U.S. stock market valuewipes out massive fortunes and small investors alike. Customers trying to salvage
their assets find out that, without their knowledge, banks had been using their savings to invest in stocks and
could cover only 10 cents on the dollar. An urgent push for greater financial accountability follows, with
aggressive financial regulations in New Deal legislation, which include the founding of the Securities and
Exchange Commission in 1934. The SEC still exists to protect investors and hold advisors and institutions
responsible in the marketplace. Though financially devastating, the Depression helps spur greater transparency
between investors and those managing their assets. Investors are understandably shaken after the crisis, and it
takes the solidification of a number of new regulations, including the fiduciary standard introduced in 1940, to
restore faith in the system.

In The Year 1961

The case of Cady, Roberts

A HEALTHY MARKETPLACE ONLY EXISTS WHEN ALL INVESTORS ARE EXPOSED TO ALL THE
SAME OPPORTUNITIES AND RISKS. When the aviation company Curtiss-Wright decides to reduce its
dividend to shareholders, one of its board members tells an associate at the firm Cady, Roberts & Co. before the
news went public, allowing the firm to cut its losses. Such blatant insider trading, in which an investor leverages
proprietary non-public information for personal benefit, signals the need for new regulatory vigilance.
Recognizing the inequality and risk inherent in insider trading, SEC Chairman William Cary rules that anyone
with inside information must disclose it to the market at large or stay out of the investment altogether.

The practice, known as disclose or abstain, remains a cornerstone of financial accountability for investors,
advisors, and institutions alike. It meant that advisors have a more transparent, comprehensive wealth of
information on which to draw and investors can be assured that everyone has access to the same information.
In The Year 2017

The Present Day

THE GREAT RECESSION OF 2008 shows that the quest for full accountability is a gradual, ongoing one.
Immediately following the recession, the housing market sags, and investors, blindsided by how precarious
some of their financial institutions actually were, push for new regulation. With the Accountability Act of 2009,
for example, companies bailed out by public funds are required to disclose exactly how the money was used and
to meet certain financial benchmarks. The Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 also steadies markets with new regulation that, among other things, applies the fiduciary standard to a
broader range of brokers and advisors. But legislation is often reactiveinvestors increasingly realize that to
preemptively protect themselves, they need to trust not in just anyone, but in the right people, including advisors
that maintain independence and adherence to the fiduciary standard.

Timelines of Trust Three of Three

Technology

Timelines Of Trust

Market changes that have challenged investor trust throughout history

Investing

Accountability

Technology

1950 The credit card

1971 Electronic trading

1983 Online banking

2000's Social Media

2017Algorithms & automation

FINANCIAL TECHNOLOGY HAS BROUGHT RAPID, UNPREDICTABLE CHANGES to the way people
organize, access, and talk about their money. It has also created new, low-cost opportunities for investors to
participate in the markets and build portfolios based on a dizzying array of new tools, with tips and data
available at any time and around the clock. The tech-driven evolution of markets has continually challenged the
role and scope of investment advisors, whose sophistication must match the speed of change in order to keep
the trust of their investors.

In The Year 1950

The credit card

ONE OF THE FIRST SIGNIFICANT ADVANCES IN ELECTRONIC FINANCE IS THE CREDIT

CARD, which quickly becomes an everyday staple after its introduction in the mid-20th century. Credit cards
prove that financial technology can help spur the growth of consumer spending and the American economy as a
whole. From the beginning, however, they demand more sophistication from consumers and investment
advisors about a new form of spending that was largely abstract and easy to misuse. Issues from credit limits,
interest rates, fees to issuing banks, and the optimal number of credit lines to keep open for a good credit rating
are unprecedented investor considerations.

In The Year 1971

Electronic trading

STOCKS WOULD GO DIGITAL, too, mostly rendering obsolete the buzzing pit of traders and brokers barking
out orders on the floor of the New York Stock Exchange. When electronic trading becomes possible, the
process of buying and selling stock becomes less apparently hectic and in some ways more secure. In 1971,
NASDAQ is established, and two decades later comes Globex, which allows electronic trading worldwide on a
range of instruments, including derivatives, futures, and commodities contracts. Today, nearly everyone on both
the buy and sell side uses some form of electronic trading, whether theyre individual investors or larger
financial groups. When the market sped up dramatically as a result of the streamlined system, and as it kept
getting faster, everyone involved in the investment marketplace had to adjust to being more agile and more
responsive.
In The Year 1983

Online banking

BANKING IS THE NEXT PIECE OF FINANCE TO GO ONLINE, shifting a longstanding control paradigm:
After hours, on weekends, anytime and anywhere, customers can check account balances, view a statement, or
transfer money without needing a bank employee to help them. To an extent, this change democratizes certain
aspects of bankingpeople have more autonomy about when and where they could engage with their assets,
thereby giving them the freedom to make decisions about their financial lives on their own time. So service
roles in the financial sectorlike consultation or customer servicemake significant strides to keep up.
Financial advisors begin to make themselves available through a simple phone call, or a text message, and later
on, video-conferencing, making the investor-advisor relationship faster and closer than before.

INVESTING TRENDS40 percent of respondents used information from social media to make decisions about
their investments. FROM SYSOMOS

In The Year 2000'S

Social Media

PARTLY IN RESPONSE TO THE NEW ONLINE CAPABILITIES OF BANKING, financial information, tips,
and advice begin appearing online. Social media have become a primary source of investment information,
sometimes faster with breaking news than the financial wire servicesbut also quicker with fake news.
Company information, stock tips, industry rumors, and unsubstantiated tweets appear constantly on social sites
without considerations for information filtering. The risk to casual investors is clear: A recent study from
Sysomos showed that 40 percent of respondents used information from social media to make decisions about
their investments. For people under the age of 40, that number was 60 percent.

In the age of constant, often un-vetted streams of information, its wise for investors to turn to advice reinforced
by the fiduciary standard. At the same time, social media used wisely makes it simpler and quicker to get
second and third opinions, as well as assess the reliability and success rates of different advisors or advisor
groups.
In The Year 2017 And Beyond

Algorithms and automation

THE RISE OF INCREASINGLY COMPLEX AND DIVERSE FORMS OF INVESTMENT now includes
robo-advising, automated financial advice derived from algorithms, artificial intelligence, and the ability to
access and analyze sources of big data. This kind of newly open access to basic investing advice is exciting for
everyone from college students managing debt to high-volume traders working at blinding speed to investment
advisors who see the potential in automating certain investment functions so that they can dedicate more time to
focusing on their clients holistic financial picture.

The continuing challenge of fast-changing financial technology only enhances the value to individual investors
of their human sources of market intelligence, which can account for their customers special circumstances as
no algorithm could. Financial technology will continue to evolve, and the value that investment advisors bring
to their clients must rise accordingly. Much of that value will have to do with trust, integrity, and the human
capacity to choose whats right over whats immediately profitable, and the result will be a healthy market and
investor confidence.