TORONTO - What do the following have in common? Misrepresentation of products and services; failure to identify customer needs and recommend the correct solution; conflict between personal gain and professional responsibility; negative remarks about competitors; lack of knowledge and skills, and omission of information about limitations of products/services.

According to psychologist Mary Gresham, founder of Atlanta Financial Psychology, these are the top ethical challenges in the insurance industry, as identified by a survey of Chartered Life Underwriters and members of the Million Dollar Round Table (MDRT).

In a presentation here at MDRT’s 2014 annual meeting, the psychologist probed how successful, stalwart professionals sometimes end up sliding down the slippery slope of ethical or criminal misdeeds that eventually get them in trouble with the law. Ethics, she noted, is concerned primarily with being fair and just to all. Legality is about meeting the rules.

Aptly titled “When Good Advisors Go Bad,” her presentation zeroed in on advisors who start out intending to be honest, ethical and lawful (as opposed to the few who have serious personality disorders) but who later succumbed to more wayward ways. She used the downward spiral of a mortgage broker named Toby Groves to illustrate her points.

The story of the broker

A certified public accountant from Ohio, Groves had promised his father that he would always be moral and do the right thing. For 30 years, he did just that, founding and growing a very successful mortgage business, Gresham said.

But after Groves changed his business model and developed a side business, he started neglecting his main business until he discovered it was $250,000 in debt, she said. Groves owned his farm and home free and clear at the time, so he decided to mortgage it, fudging the numbers so he could qualify. Later, as the debt mounted, he took other measures to get around it until three years later, when the FBI showed up at his door. Groves wound up pleading guilty to tax evasion and fraud, drawing a sentence of two years in prison, and being ordered to repay back taxes of $300,000, she said.

Gresham, who is vice president of the Georgia Psychological Association, said Groves did what many people do in tough situations: He made a series of small missteps that gradually caused the problem to expand.

For instance, when applying for the mortgage loan, he lied on the application about his income, since he did not have an income at the time. Later, when he discovered other problems at the business, he tried to gloss over them as well.

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“Unethical actions typically begin with a small, acceptable misstep that does not seem too big,” she said. By comparison, if an accounting audit shows a big discrepancy, the audit company typically notices and takes immediate action. It’s the small discrepancies that are typically dismissed, she said. After a while, even larger misstatements go unnoticed.

Why does this happen? “Slowly over time, our standards change in imperceptible ways,” Gresham said. “Our new standard for behavior is affected by what we have most recently done, not by what we did when we first entered the business world.”

In the case of Groves, once he discovered the other problems at his main business, Gresham said, he:

  1. Decided to apply for “air loans” (fraudulent mortgages) on false properties. Rationalizing that the borrowing is only temporary, to solve a personal problem, “is the most common justification for unethical and illegal behaviors,” Gresham observed.
  2. Decided to tell his employees and colleagues about his problem and ask for their help with getting the air loans. They all agreed to cheat on his behalf, she said, noting that Groves was a popular leader and that people “have a tendency to follow the leader of a group.”

Other contributing factors

Concerning the air loans, an activity called “money priming” was a contributing factor, Gresham indicated. This involves setting up people to think about wealth, an activity that psychologists have found makes for greater likelihood to cheat. For instance, Gresham said, when subjects in a lab are primed with cues about wealth, “they are more likely to cheat on a task that pays them for the number of correct answers.”

Financial advisors need to be aware of money priming in order to “understand the unconscious effects of working in financial services,” she added. In addition, this can help advisors to prepare themselves “for the temptations and dilemmas that will come your way.”

Another contributing factor was misguided empathy. People tend to care and want to help if a liked person is in serious difficulty, Gresham said. Although helping such a person that makes them feel good, sometimes they do not consider whether the help is really hurting others, self or society, Gresham said. “In this way, the higher human emotion of empathy can lead to unethical behaviors.”

Still other contributing factors that Gresham identified include:

  • Commitment: After having committed time, energy and money to a course of action, it’s difficult to reverse course.
  • Incentives: Monetary rewards tied to sales or other figures that emphasize short-term outcome goals create a powerful incentive toward unethical behavior.
  • Cheater’s high: This is the thrill and self-satisfaction that some people experience after having gotten away with something.

Advisors Guide to Selling IUL“No one is exempt from the dynamics that lead to unethical acts,” the psychologist said. “Much of it is beyond our immediate consciousness. We don’t know what we don’t know.”

Some organizations use codes of ethics, she noted. But code-based ethics tend to encourage people to meet only the minimum standards and to focus attention on rules, she said. The problem is, rules often don’t really help “because our biggest ethical dilemmas occur in gray areas where the rules may be in conflict with each other or unclear.”

What does work? Promoting ethical behaviors, Gresham said. Examples she cited include focusing on ethical leadership, ethical culture, ethics education on reasoning (not rules) and rewards for ethical behavior. In addition, focus on the “long-term value of reputation (versus short-term emphasis on profit),” and “emphasize the process, not the outcome.”

, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda may be reached at [email protected].

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Advisors Guide to Selling IUL