Recommendations come from myriad sources such as friends, family, co-workers, online reviews and even e-commerce algorithms. Studies have shown that recommendations are trusted more than information proffered by media sources or corporate advertising. However, with daily reports of fraud and deception in political and financial spheres, a tide is building that threatens to wash us all in cynicism and suspicion. With “pay to play“, “pay per post” and other hidden agendas, should recommendations still be trusted?
By now you’ve likely heard of Bernard L. Madoff. This hedge fund operator is accused of the largest corporate fraud in United States history, to the tune of $50 billion dollars lost. In a SEC complaint, Mr. Madoff–a former NASDAQ chairman–is accused of a “stunning fraud of epic proportions” by essentially running a Ponzi scheme where new investor money was used to cover losses and pay-out returns to previous investors.
While there were plenty of warning signs along the way such as steady returns during tumultuous times and allegations of manipulation from other brokers, investors continued to pour money into Madoff’s funds.
Madoff used interesting schemes to dupe high net worth investors, many of which preyed on basic human needs of social connection and esteem.
According to a Wall Street Journal article, Madoff cloaked his investments in a “mysterious allure and sense of exclusivity.” Simply getting into the club–if you will–gave investors bragging rights, a sense of belonging, and enabled them to feel they had access to something special.
In fact, according to the same WSJ article, once an investor was “in”, it would be considered an insult to ask deep questions about the fund for fear of being thrown out. “When you are in an exclusive private club,” the article notes, “you don’t go rummaging around the kitchen to make sure the health code is being followed.”
Adding insult to injury, many of Madoff’s customers came from good old “word of mouth” connections where new clients were referred by other wealthy families, political leaders, and charity organizers.
Mark Penn, writes in a recent Wall Street Journal article, that Madoff, “sold himself to people on the basis of brand, and he got access to more marks by using the smart, rich and famous to introduce him to more of the smart, rich and famous.”
Madoff’s fund wasn’t built on advertising. It wasn’t built on direct marketing tactics. It was built on leveraging customer trust, exclusivity, and word of mouth recommendations.
Many otherwise very intelligent people failed to ask questions of Mr. Madoff as they invested millions of hard earned dollars.
While red flags popped up on occasion, as long as “the returns” kept coming most investors operated from a “don’t ask, don’t tell” perspective. Investors, referred by other people they trusted, wanted to gain access to this exclusive hedge fund so badly that they in effect checked their brain at the door.
Don Peppers and Martha Rogers often talk the importance of building customer trust to improve revenues and profitability. In an article, “Trust Stakes Its Claim“, they say, “Although trust is the welcome consequence of any successful customer relationship, it is not something to take for granted. Building trust is an investment in the future of your customers. You have no more important asset; you have no more important strategy.”
While many companies have altruistic motives for building customer trust, Madoff did the opposite–using customer trust to defraud. He leveraged his political, social and faith (Judaism) network to ensure a steady flow of recommendations (and investors). And people blindly trusted him with their millions.
Surely, this is an egregious example of fraud, and hopefully an outlier. That said, as economic times get tougher and scam artists abound, it is probably fair to ask more questions, perform due diligence on personal and corporate investments, and check the assumptions that underpin our decision making.
Should we stop trusting altogether? That’s not a very practical strategy. We live in communities, we need to participate. That said when it comes to recommendations– whatever their source–we should at least pause and think about the motivations for those recommendations. Opaque is out, transparency is in.
* Should recommendations–from companies, friends, relatives, etc be trusted? Under what circumstances?
* Many of Madoff’s investors were “swayed by the gut” and ignored the warning signs. What analytical techniques could have sniffed out this fraud?
* With cases of fraud and deception abounding, what practices can companies use to establish and maintain customer trust?
* Have you taken a break from thinking in a significant area of your personal life or business? Who is watching your hen house?