Big Idea 2015: Enlightened Finance – The Ghost of Finance Yet to Come

In this series of posts, Influencers and members predict the ideas and trends that will shape 2015. Read all the stories here and write your own (please include the hashtag #BigIdeas2015 in the body of your post).

As we inch closer to yet another New Year, my hope is that 2015 will be the year that we begin to embrace a new incarnation of financial capitalism: “Enlightened Finance.”

With apologies to Charles Dickens, his seasonally appropriate classic, A Christmas Carol, helps illustrate what I mean.

The 2008-2009 financial crisis was a case study in what many have dubbed “Irresponsible Finance.” It was a period during which we all witnessed what happens when we lose touch with the stewardship mission, purpose and values that should underpin our financial system. The financial crisis was the equivalent of Dickens’ “Ghost of Christmas Past.”

Since then, we have been walking along the path toward “Responsible Finance.” Milestones along this path include the ongoing, though as yet incomplete, overhaul of global financial regulatory infrastructure; dramatically higher levels of core capital and reduced levels of leverage at most regulated financial institutions; and serious, sincere, tangible efforts by financial service providers, industry associations and regulators to put the interests of clients first and to restore professionalism and integrity to our industry.

"Responsible Finance” – finance in the service of society; finance based on the core principal of stewardship; finance as a means to greater ends — is the “Ghost of Christmas Present.”

What about the financial equivalent of the “Ghost of Christmas Yet to Come?” What does that look like? (In Dickens’ classic, the Ghost of Christmas Yet to Come is the final apparition that appears to Ebenezer Scrooge and prompts him to adopt a more caring and other-centered attitude in life.)

The Ghost of Christmas Yet to Come is called “Enlightened Finance.”

Over the course of our lifetimes, financial capitalism has become the dominant socio-economic construct in the world. In the words of Robert Shiller, Sterling Professor of Economics at Yale University finance is “as much…an ordering principle in our lives as the rising and setting sun, the seasons, and the tides.”

Few would argue that financial capitalism has contributed to many positive social outcomes in recent decades. One underappreciated example, recently documented by the World Bank, is a dramatic reduction in the percentage of the world population living in extreme poverty, which fell from 36 percent to 15 percent in the last 25 years alone, the result of historically high average annual rates of economic growth in excess of 3 percent. Indeed, financial capitalism, the successor to industrial capitalism, often seemed to be able to deliver everything we wanted.

Then came the financial crisis, which caused many to question core assumptions underpinning our system of financial capitalism and sparked an intense international debate about the role, benefits, costs and risks of finance.

Some six years later, there is still no consensus as to what society expects from our financial system today and what this system should look like tomorrow and beyond. Like Scrooge in Dickens’ Christmas parable, we’ve come to realize that we weren’t behaving properly, but don’t yet know what we’re supposed to be doing – what the “right thing” looks like.

That will require us, as Adair Turner suggests in What Do Banks Do?,“to ask fundamental questions about the optimal size and functions of the financial system and about its value within the economy, and about whether and under what conditions the financial system tends to generate economic growth or stability.” Until we can answer these questions clearly, efforts to give us the financial system we deserve are destined to fail.

That is what “Enlightened Finance” is all about.

If financial services indeed wants to be a “forward-looking… industry that better serves society,” (as the CFA Institute’s Future of Finance Initiative puts it), then asset management firms, consumer banks, investment banks, wealth management firms, mutual funds, insurance companies, hedge funds and private equity investors are going to have to do a much better job listening to, interpreting and understanding the needs of society. We need to help to design a new more holistic corporate social compact to replace narrow compact of financial capitalism we’ve been operating under for decades. And we need to do a much better job of responsibly living up to the terms of that compact.

That is what the Ghost of Finance Yet to Come looks like.

John G. Taft is CEO of RBC Wealth Management - U.S., and author of Stewardship: Lessons Learned from the Lost Culture of Wall Street (Wiley, 2012). RBC Wealth Management-U.S. is a division of RBC Capital Markets, LLC, a member of NYSE/FINRA/SIPC.