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Exploring antecedents for Misselling in Financial ServicesExploring antecedents for Misselling in Financial Services

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Abstract

Investing in Financial services products pose a challenge for customers. While the complexity confuses them, the potential misselling by financial agents lowers confidence of investors further. While dominant literature attributes the misselling to ethical reasons, this paper attempts to raise the dimension of knowledge asymmetry among various stakeholder levels in the organization as possible reason for misselling of financial services. The paper uses the dual lenses of service quality gap model and service dominant logic as possible solutions to the misselling issue.
Exploring antecedents for Misselling in Financial Services
Sheila Roy,
Indian Institute of Technology Bombay, India.
Krishanu Rakshit,
Indian Institute of Management Calcutta, India.
Abstract
Investing in Financial services products pose a challenge for customers. While the com-
plexity confuses them, the potential misselling by financial agents lowers confidence of in-
vestors further. While dominant literature attributes the misselling to ethical reasons, this
paper attempts to raise the dimension of knowledge asymmetry among various stakeholder
levels in the organization as possible reason for misselling of financial services. The paper
uses the dual lenses of service quality gap model and service dominant logic as possible
solutions to the misselling issue.
KEYWORDS:
Financial services, Misselling, Service Quality, Service Dominant logic
1 Introduction
Marketing of financial services has always been faced with the challenging task of setting the
right expectations about the product and services. The service characteristics of intangibility,
heterogeneity and inseparability are far more prominent in financial services as compared to
services such as hospitality, health or telecom. Such characteristics increase the propensity for
ethical abuse (Kennedy & Lawton, 1993) and have led to a range of problematic behavior such
as overemphasizing particular products, exaggerating claims, accepting questionable credit risks
(Murphy, 2004). The phenomenon of misselling has therefore received attention from regulators,
practitioners and scholars alike. Most literature on misselling has been viewed through the lens
of theories related to marketing and sales ethics (Yi, Dubinsky & Lim, 2012) or agency theory
(Inderst & Ottaviani, 2009) which attributes that the inherent nature of the principal agent
relationship allows for misselling.
Misselling has been is defined as the questionable practice of a salesperson selling a product that
may not match a customer’s specific needs (Inderst & Ottaviani, 2009). Yi et al. (2012) describes
it as ‘inappropriate’ and ‘misleading’ behavior of sales person. A central assumption made in
most research work related to misselling is that the act of misselling is a ‘wilful act’ and an ‘act by
design’ to intentionally sell a sub-optimal product to the customer for personal gains. Therefore
most research work on misselling is in the domain of marketing ethics. The sales function, sales
process and sales organization is described as a laboratory of ethical dilemmas (Wotruba, 1990)
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due to the nature of the buyer seller-dyad. It is proposed that sellers take advantage of the
information asymmetry between seller and the buyer and bounded rationality (Diacon & Ennew,
1996) on the part of the buyer to missell. Other significant researchers in the area of misselling,
investigate the perception of sales field personnel of (Dubinsky, Jolson, Michaels, Kotabe &
Lim, 1992) and discover that sales personnel feel that organization should not only provide
clear policies and directives but communicate with them regarding specific ethical dilemmas.
The role of supervisors and supervising processes is explored in research work (Murphy, 2004;
Wotruba, 1990) and the impact that supervisors have on ethical decision making process is
explored. Jose & Thibodeaux (1999) recommend institutionalization of ethics through implicit
methods such as corporate culture of implementation of organizational ethical directives. Much
of the ethical conflict faced by sales executives has been attributed to sales supervision, pressure
to adhere to targets and organizational goals, ethical climate in the organization or industry
(Baumhart, 1968; Dubinsky, Berkowitz & Rudelius, 1980). The sales organization has been
described as unique compared to other organizational units in most companies due to limited
daily contact with the team which would provide feelings of group affiliation and understanding
of corporate norms (Dubinsky et al., 1992).
While exploring the ethical issues (Diacon & Ennew, 1996) of Insurance marketing in UK, the
authors bring forth the impact of product complexity and longevity and the importance of trust
and confidence in the sales process. Devlin (2007) and Gabbott & Hogg (1994) highlight the
nature of the complex decision making process that the clients go through. Due to the ‘opacity’
of the criteria, clients are often forced to choose extrinsic criteria rather than intrinsic criteria
to select their products (Gabbott & Hogg, 1994). Further, most clients have largely short-term
outlook, whereas financial products typically have long investment horizons (Redhead, 2011).
Therefore, in response to the malice of misselling and with the objective of protecting investors,
organizations and regulators in the financial industry have implemented measures such as po-
larization, best advice and compulsory disclosure of commissions and incentives, to counteract
misselling. Training to field personnel on ethics and ethical conflict has been provided. How-
ever, such regulations have not had the desired impact (Devlin & Ennew, 1993) largely due to
implementation methods applied by regulators and financial service providers.
As highlighted above, most of the prominent research assumes that misselling as ‘wilful act’ or
‘act by design’. However, this paper introduces an additional assumption in the phenomenon
of misselling. To understand the phenomenon of misselling, this paper proposes that the sales
personnel executive ‘inadvertently’ and ‘without conscious knowledge’ may missell a financial
product due to lack of knowledge about the intricacies of the financial system as a whole in-
cluding various categories of financial services products that serve customer’s financial needs.
This paper, in no way, denies the existing assumption of ‘questionable marketing ethics’ on the
part of the sales personnel and sales organization to understand misselling. It only proposes
that the phenomenon of misselling be evaluated through an additional lens of ‘an inadvertent
missell’. Prominent researchers in agency theory (Eisenhardt, 1989) encourage that organiza-
tional research (that explore the phenomenon for e.g. misselling) need to be based on multiple
theories to reflect complexity and yield a more realistic view of organizations.
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Therefore, the objective of this paper to establish the assumption of ‘inadvertent missell’ through
a critical analysis of the nature of the financial service product and through the lens of other
established theories. Firstly, the paper will draw upon agency theory (from which emerges
the assumption of ‘lack of ethics’ as a driver of misselling). Next, the paper will explore the
above assumption (an inadvertent missell) through the lens of the Gap Model of Service Quality
(Parasuraman, Zeithaml & Berry, 1985) and Service Dominant Logic (Vargo & Lusch, 2004).
The last section will highlight on future research direction to firstly verify the assumption
through propositions that can test the validity of the assumptions.
2 Review of misselling from an agency theory perspective
One branch of agency theory explores the principal- agent relationship and the optimal way to
structure a contract between them (behavior based vs. outcome based). The decision of the
type of contract depends on various factors such as information systems in place to identify
agent behavior during transactions, uncertainty of outcome due to external forces, risk aversion
of agent and principal (Eisenhardt, 1989), task programmability, outcome measurability and
length of relationship. In this case, the nature of information above refers to the extent of
information that principal is able to gather regarding the agents behavior. Higher the amount
of information (or the better the information systems) to track behavior of agent, the contract
between principal and agent is behavior based.
However, the design of the contract does not seem to account for the level and quality of
knowledge that the agent has regarding the nature of the product exchanged. It assumes that
the transfer of knowledge of the service being exchanged between principal and agent and further
between agent and customer is perfect and there is no information loss or manipulation in the
exchange. When the phenomenon of misselling in financial services is explored through the
lens of agency theory, a variable that needs to be accounted is the effectiveness with which
knowledge is transferred between principal, agent and customer. In a mathematical model to
design an optimal contract (Inderst & Ottaviani, 2009) a suitability standard is adopted to
counteract misselling and the impact of various variables on the suitability standard is studied.
The authors explore a number of variables, however knowledge flow between principal and agent
remains unexplored. Therefore, a review of the treatment of misselling through agency theory
perspective informs us that the effect of knowledge transfer of the product as a determinant to
a missell, remains unexplored.
3 Misselling - a gap model perspective
A model of service quality that has been widely researched and practiced worldwide is the GAP
Model (Parasuraman et al., 1985). The model defines service quality as the magnitude and
direction of the gap between customer expectation and customer perception of service. This
gap in turn is shown as a function of four gaps referred to as internal gaps within the organization
- the marketers’ gap. The process of sale for any services (where there is a chance for a missell
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to occur) and especially for financial services is the process of setting accurate expectations
about the financial product. It is one of the organizational processes in which Gap 4 of the
GAP model emerges (gap between what the company promises and what it actually delivers).
Interestingly, misselling can also be conceptualized as a gap between explicit expectations that
have been set with the customer and the actual product or service delivered. In other words,
misselling is one form of deficient service quality. However, prior to the gap between service
promises and service delivery, is the gap between management specification of the product and
actual service delivery (Gap 3 of GAP model). In the financial services product category, it can
signify the gap between the knowledge at the product development level (manager who has the
skill set to develop the product) and knowledge of the sales personnel (who sells the product).
The knowledge of financial product designer will be far higher. Therefore, there exist knowledge
asymmetry and subsequently information asymmetry between various managerial and functional
levels within the financial services organization. Misselling in financial services may arise due
to such an asymmetry in the level of knowledge. For example, insurance products are designed
by product managers in conjunction with actuaries. The various covers and exclusions in a
product are designed based on aggregated information and assumptions about losses in various
customer segments and accumulated through various means. However, not all of the information
processed during product development is made available to the sales people. The outcome of
the product development processes are (e.g coverage and exclusions) are communicated to the
sales force. As a result, when a sales executive is interacting with a customer, they are not in
a position to assess if the assumption made during the product development apply to a certain
end customer. Such knowledge asymmetry in various levels of organization may lead to an
‘inadvertent missell’ as compared to ‘missell by design’.
4 Exploring Service Dominant Logic to understand misselling
Service Dominant Logic (SDL), conceptualized by (Vargo & Lusch, 2004) proposes a set of foun-
dational premises on which they invite researchers to develop new worldviews for organizational
theories. SDL has been an area of much intellectual and philosophical thought in the past years.
One of the critical premises of SDL is centered around knowledge, skills and competencies and
it was initially proposed that the fundamental unit of exchange in any goods transaction or
service is knowledge and skills. Services was therefore defined as the application of specialized
competencies (knowledge and skills) through deeds, processes, and performances for the benefit
of another entity or the entity itself and knowledge development a key competitive resource.
Subsequently through dialogues and critiques of SDL in various forums the first foundational
premise was reworded to ‘Service is the fundamental bases of exchange’. Another key foun-
dational premise is that of the concept of ‘value in use’. SDL proposes that value cannot be
embedded in a product by a manufacturer and sold to customer. Value is co-created during the
use of the product/service by the beneficiary i.e. Value is always uniquely and phenomenologi-
cally determined by the beneficiary (Vargo & Lusch, 2008) Through this logic value is no more
a static construct. It is dynamic, experiential and contextual based on the manner in which the
customer uses the product/service for their benefit.
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We now explore the phenomenon of misselling through the lens of SDL. Misselling has been
is defined as the questionable practice of a salesperson selling a product that may not match
a customer’s specific needs (Inderst & Ottaviani, 2009). The financial services category as
elaborated in the previous section is vast in its entirety and includes principally all modes of
investment available to any individual, family or corporate to improve returns or mitigate risk.
Three broad category of financial services include investment (equity, mutual funds, derivatives,
real estate etc); banking; and insurance. Organizations that operate these services are distinct
entities (except for banks which act as distribution arms for equity, mutual funds or insurance).
Additionally, in mostly all countries there are at three regulators that monitor and regulate the
market (for e.g. in India the regulators are SEBI1, RBI2and IRDA3). Each of the industries and
firms within the industry adopt its own distribution mechanism and train their intermediaries
on the products that they offer (goods centric training). Essentially therefore, the financial
services industry is structured around a goods dominant logic. The above industry structure
highlights the vast knowledge asymmetry that might exist between various industry stakeholder
(principal and intermediaries) alike and subsequently, the information asymmetry between in-
termediaries and firms. Given that one of the many benefits that customers seek from financial
services provider is the knowledge and skill set to plan their financial security and returns while
minimizing risks, the structure and current mind-set of the financial services industry as a whole
lends it-self to ‘inadvertent missell’. Therefore adopting a view of trough the lens of the S-D
logic, through deductive reasoning, it follows that misalignment of customers needs with a firms
sales effort maybe a result of the knowledge asymmetry than an ‘act by design’.
A Service Dominant approach by the financial services industry as a whole would attempt to
align the industry towards the idea of sharing knowledge and competencies between stakeholders
and building the bridges to decrease knowledge asymmetry and therefore target misselling at
its root. Abela & Murphy (2008) highlight the S-D logic is found to be a positive development
for marketing ethics because it facilitates the seamless integration of ethical accountability into
marketing decision-making. In the S-D logic, the goal is to increase a firm’s value: this includes
the value of its relationships with customers, suppliers, and society as whole, and therefore the
company and its multiple stakeholder interests are more closely aligned.
5 Conclusions and future scope of research
This paper introduces an additional dimension in the phenomenon of misselling in financial ser-
vices - that misselling occurs ‘inadvertently’ rather than ‘by design’ and the research agenda to
explain and control misselling should therefore look beyond area of marketing, more specifically,
sales ethics. The objective of this paper to provide an additional explanation to misselling- that
of information and knowledge asymmetry among stakeholders that leads to misselling. This
explanation is supported by a critical analysis of nature of financial services product viewed
from the perspective of the dominant models. Agency theory attempts to establish that missell
1Securities and Exchange Board of India
2Reserve Bank of India
3Insurance Regulatory and Development Authority
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may be the result of contractual arrangements between principal and agent, which could explain
ethical misconduct. Subsequently, through the analysis of misselling as deficient Service Quality,
we use the GAP model of Service Quality to establish how knowledge asymmetry exists between
various management levels and may lead to misselling. Lastly, the emerging world view of Ser-
vice Dominant Logic is also explored and two of its foundational premises (knowledge exchange
and value in use) are used as basis to establish the importance of knowledge alignment across
various stakeholders to create a stronger value proposition and thereby eliminate misselling.
However, such knowledge alignment across the different organizational levels is difficult; and
in the absence of clear metrics, very difficult to implement. Future research is required to
understand and explore the nature of the knowledge asymmetry in financial services across
various stakeholders and discover gaps in service (over and above misselling) that might exist
on account of this asymmetry.
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