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Is Honesty a New Paradigm in Banking?

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"Honesty" and "banking" are rarely mentioned in the same breath these days, but here's a reason companies should act in their customers' best interests: if they don't, it's likely their former employees will tell on them.

This month's exhibit A is JPMorgan Chase, which found itself excoriated in the pages of the New York Times for selling subpar mutual funds to its clients in an effort boost profits.

It should go without saying that this is a short-sited strategy, indeed. Once the customers get wind of the fact that the company with which they are doing business thinks of them less as an equal and more as an asset to be plundered, it's quite likely they will take their business elsewhere. This, in turn, gives employees an incentive to remain honest, since churning clients is rarely a healthy career model.

It's hard to tell from the Times' article who dropped the dime on the banking behemoth, but it's clear that many of the company's brokers were quite unhappy with the pressure to push product. We know, because several who have since left the employ of JPMorgan Chase said just that. "It was all about the money, not the client," was one typical statement. "I was selling JPMorgan funds that often had weak performance records, and doing it for no other reason than to enrich the firm," said another.

Before we go any further, let me make it clear just how bad these mutual funds are. They frequently trailed their supposed market benchmarks. They were laden with fees. The marketing seemed designed to trick less than financially savvy bank customers.

As the brokers who left JPMorgan Chase realized, this is no way to forge a sustainable career. And they are not alone. It seems that barely a week goes by without some employee somewhere coming forward to say the 2012 version of "I'm mad as hell and I can't take it any more." Earlier this year, it was Greg Smith, a former executive director at Goldman Sachs, who was so angered by "the decline in the firm's moral fiber" he made sure to get his resignation letter published on the New York Times' op-ed page, complete with such details of how his fellow employees referred to clients they were planning to fleece as "muppets."

This disgust is, in many ways, new. The past three decades could be called the age of greed, where all is fair in the ways of making money. Wrong-doing was, and continues to be, endemic. A recent study by economists Alexander Dyck, Adair Morse and Luigi Zingales found that anywhere between 11 and 13 percent of the largest companies in the United States are up to no good at some point over the course of a year. It's likely worse in the financial services sector; a recent survey by law firm Labaton Sucharow, conducted among folks who work on Wall and Fleet Streets, discovered that 24 percent of those queried believe it was not possible to succeed in their business without a willingness "to engage in unethical or illegal conduct." Not surprisingly, 26 percent of those who took part in the survey admitted to either taking part in or knowing about "wrongdoing in the workplace."

Why these numbers would be so high is the subject of much debate. Some, like MSNBC host Chris Hayes, speculate that our winner-take-all economy encourages bad behavior by simultaneously making the rewards for achievement so potentially high and the consequences of failure so economically catastrophic. Others point to regulatory laxness. In any case, very few come forward from inside the wrongdoing companies to tell tales until it is much too late to do much to change things.

Yet it seems people like Greg Smith and the former JPMorgan Chase employees who spoke with reporters about ethical problems at their former employer are leading the way to a new paradigm. They seem to realize a truth that eludes the bosses who are paid the big bucks to run these companies. If the interests of a company, consumer and employee are not aligned, a company can't prosper in the long run.

Jon Stein is the founder and CEO of Betterment. Passionate about helping people make smart decisions with their money, he founded the online investment product in 2008. Jon is a Chartered Financial Analyst (CFA), a Series 7, 24, and 63 Registered Securities Representative, and a graduate of Harvard University (Economics) and Columbia Business School.

His interests lie at the intersection of behavior, psychology, and economics. What excites him most about his work is making everyday activities and products more efficient, accessible, and easy to use.