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Should Recommendations Still Be Trusted?

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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.

Questions:
* 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?


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Paul Barsch directs services marketing programs for Teradata, the world's largest data warehousing and analytics company. Previously, Paul was marketing director for HP Enterprise Services $1.3 billion healthcare industry and a senior marketing manager at global consultancy, BearingPoint. Paul is a senior contributor to MarketingProfs, a frequent columnist for MarketingProfs DailyFix, and has published over fifteen articles in marketing, management, technology and healthcare publications. Paul earned his Bachelors of Science in Business Administration from California Polytechnic State University, San Luis Obispo. He and his family reside in San Diego, CA.

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  • by Neil Anuskiewicz Mon Jan 12, 2009 via blog

    * Should recommendations–from companies, friends, relatives, etc be trusted? Under what circumstances? Yes, trust but do research yourself. I get lots of recommendations from friends some of which I take and some of which I leave alone. Normally, I base my decision on either a basic feel for if something is right and my own research. * Many of Madoff's investors were "swayed by the gut" and ignored the warning signs. What analytical techniques could have sniffed out this fraud? At the risk of sounding trite, wouldn't the principle of "if it sounds too good to be true..." have been useful here? That combined with the warning signs shows that these investors (and regulators) did not do even the most basic due diligence and ignored screaming warning signs. * With cases of fraud and deception abounding, what practices can companies use to establish and maintain customer trust? Communication and transparency come to mind immediately. * Have you taken a break from thinking in a significant area of your personal life or business? Who is watching your hen house? Good question. Everyone should think that one through.

  • by Claire Ratushny Mon Jan 12, 2009 via blog

    Terrific post, Paul. Where business and the exchange of substantial sums of money are concerned, recommendations should be balanced by extensive research. Sadly, people who skimp on doing due diligence may get burned. The Madoff scandal hurt a great many people. Hopefully, it has taught us all a valuable lesson or two. We can't be too careful about choosing where and how to invest for ourselves and our businesses. And: if it looks too good to be true, it's probably a scam.

  • by Ted Mininni Mon Jan 12, 2009 via blog

    Once again, Paul, we are reminded about the importance of transparency and building trust in business. Unfortunately, the trust lost by Americans in our financial institutions have repercussions even for those lenders, banks and investment firms that have continued to do business in an above-board manner. As you say, there is more suspicion now, and much of that is probably unfounded. Once lost, trust is almost impossible to regain. Trust is waning for some consumer product manufacturers, as I write about in my posts, as well. Food and toy safety scares, for example, have eroded consumer confidence in many instances. This really forces consumers to become educated before they invest their hard-earned dollars anywhere. Or when they purchase consumer products. Doesn't it?

  • by Lewis Green Mon Jan 12, 2009 via blog

    Paul, Excellent questions. So who do we trust? In a hiring situation, I primarily look at recommendations as a sign that the candidate is capable. At the end of the day, whether or not I hire that candidate has little to do with the recommendation. It has much to do with the way he or she answers my questions and my gut feelings about that person's trustworthyness.

  • by Paul Barsch Mon Jan 12, 2009 via blog

    Neil, thanks for commenting. You mention when it comes to recommendations, you take some and lose some, and do your own research where appropriate. As you know, research takes time. Each of us have to prioritize our time (often re-prioritizing on a daily basis). We all have to make a cost/benefit tradeoff in decisioning--and then also decide when we're NOT willing perform the due diligence needed --and maybe then take a recommendation from another source. But at that point we cannot stop thinking. Even a recommendation from a trusted source deserves thoughtful analysis...

  • by Paul Barsch Mon Jan 12, 2009 via blog

    Claire, you make a great point about business and the exchange of substantial sums of money. Not in all cases, but for many of these investors, the monies invested with Madoff were a small proportion of their overall wealth. The monies invested were a "drop in the bucket" and therefore not substantial enough to apply the appropriate due diligence and therefore they accepted a recommendation from a trusted source instead of doing the research. What sum of time, money, resources, talent etc, qualify as "substantial"? What is the threshold that needs to be crossed where we'll do the appropriate analysis? Each one of us will have to answer that question for ourselves!

  • by Paul Barsch Mon Jan 12, 2009 via blog

    Ted, more suspicion and less trust means that consumers will need to as you said become more "educated". Unfortunately, it seems as there are too few hours in the day doesn't it? We can't educate ourselves on every topic, we have to trust at some point, we have to prioritize what's important to us. Where will we perform the due diligence? Where will we blindly take a recommendation from a trusted source? And can that "trusted source"--really be trusted?

  • by Neil Anuskiewicz Mon Jan 12, 2009 via blog

    Paul, it is my belief that the world is too complex to not rely on recommendations, broadly understood. Even if we do not do it consciously, we are constantly doing things on the indirect and direct recommendation of others. If a lot of people consume a product, do something a certain way, etc., we do it. If we had to think about everything, we would soon be overwhelmed. That is the reality of the modern world. To a larger degree that we would prefer to admit this thing runs on trust. Yes, it is precarious, as recent events have demonstrated, but there is no reasonable alternative.

  • by Paul Barsch Mon Jan 12, 2009 via blog

    Neil, great point. It stands to reason that time is definitely a constraint, as is the volume of decision making in deciding whether to accept a recommendation from others. That said, how can we ensure transparency and maximum disclosures in the driver of a recommendation? Ideally, if I am going to take a recommendation, I'd like to know the motivations/intent behind that recommendation so that I can ultimately decide how to "weight" it. If I get a "recommendation" from my smart e-cart in the grocery store of the future to buy a certain brand of ketchup, is that recommendation based on what the retailer thinks I will like based on past purchases, or is it based on excess inventory in the retailer's warehouse or special pricing subsidies from the manufacturer? Can I trust the recommendation? Should I?

  • by Ted Mininni Mon Jan 12, 2009 via blog

    You're right, Paul. We simply don't have the time to do everything we need to or we'd like to. But speaking of priorities: can't think of anything more important than finding out about the food we purchase for our families and the toys are kids want to play with, can you?

  • by Paul Barsch Mon Jan 12, 2009 via blog

    Rawdawg, thanks for commenting. I see from your website you are well versed on Madoff and the financial meltdown. More than trashing the SEC or Madoff, I'm interested in whether the power of a recommendation--wherever it comes from--is waning, or perhaps conversely in an age of little trust--more important than ever. The answer to this question has important implications for marketers. With cases of fraud and deception abounding, what practices can companies use to establish and maintain customer trust? Under what circumstances should recommendations be trusted?

  • by Jeffrey Gerstein Fri Jan 16, 2009 via blog

    My business is probably 95% referral based as we manufacture a product that in our industry is like the Rolls Royce or Bentley of the car industry.Our prices are very high,but the quality of what we manufacture, makes the investment worthwhile to the corporation or individual that wants to have a 'Train Layout". We manufacture Mineature Model Train Layouts that you can find in places like The Museum of Science & Industry in Chicago,The Sacremento Train Museum,The Aventura Mall(one of the top 3 malls in the USA),along with many private jobs ranging in cost from $250,000 to over $2,000,000.We have been in business for 17 years and quite often we get an inquiry that leads to a job through referral.After signing a letter of Intent and then agreeing to a price,The customer usually wires us a large deposit into our bank and probably 90% of our customers only speak to us and never meet us.The level of recommendation as you can imagine is very high and that has happened due to not only very hard work , but also very good work. Around 5 years ago,we became the number one company in the USA in our niche . Bernie Madoff has duped many very intelligent people that were very wealthy that wanted to be part of the Bernie Madoff Fan Club. Madorf has turned out to be the worst of the worst with no conscience as if he had one ,he could have never did what he did.He comes from the less than one half per cent of the world population and 'We Cannot ever let one guy like Madoff ruin the Importance of a real Referral as without referrals ,the business world would no longer exist. Thank you; Jeff G. I can be reached at 305 305 5926 if you would like to speak after you have looked at www.smarttinc.com .

  • by Paul Barsch Fri Jan 16, 2009 via blog

    Jeffrey, I wish that Madoff was the only bad apple--there are plenty more, almost daily in the WSJ. Perhaps it just "seems" there are more case studies of fraud than usual--as bad news is amplified in this financial crisis. That said, it's great to see the power of recommendation still alive--if just barely. I congratulate you on the success and market leadership of your company.

  • by Nounteeweenia Tue Jan 20, 2009 via blog

    I am unable to understand this post. But well some points are useful for me.

  • by WP Themes Thu Jan 22, 2009 via blog

    I think your blog need a new wordpress template. Downalod it from http://genericwpthemes.com . The site has nice and unique wordpress templates.

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