No one seems to be talking about the economic concept of moral hazard any more. At the time of the Lehman collapse, concerns were widespread that if the risks inherent in managing a financial firm were removed by underwriting its losses with public funds, we would be removing the economic counterweight of insolvency that serves to constrain risky behavior. Now, with hundreds of billions of dollars flowing from the national government to shore up private enterprise companies, we are empirically testing the theory.
While economic theory and public policy are important, for stewards of wealth the real crucible of moral hazard is much closer to home. Fiduciaries know that insulating themselves from the very risks they advise their clients to bear is unconscionable — no matter how lucrative it might be in the short run. Reassuring your clients that your moral compass will not be a hazard of this financial turbulence is the most important message you can convey to your clients. And now more than ever, this message needs to be backstopped by behavior. Ethical fiber demonstrated throughout good times and bad times provides the only platform on which trust can stand.