In a surprisingly candid opinion piece in the New York Times yesterday, recently resigned Goldman Sachs executive director Greg Smith essentially pulled the curtains opened and showed how Wall Street really works. Smith declared that he was resigning from the large brokerage firm because, in his view, its culture is all about putting the client’s interests last. “To put the problem in the simplest terms,” he writes, “the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.”
Behind the curtain, he said that the criteria for promotion and success was not “leadership” or “doing the right thing.” Instead, he said, “if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.” And how do you make money for the firm? Smith outlined three ways. A Goldman broker or executive can rise in the ranks by “persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit.” Or, alternatively, “get your clients–some of whom are sophisticated, and some of whom aren’t–to trade whatever will bring the biggest profit to Goldman.
Pulling the curtain back still farther, Smith said that “It makes me ill how callously people talk about ripping their clients off. Over the last 12 months, I have seen five different managing directors refer to their own clients as ‘muppets,’ sometimes over internal e-mail… Will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.” He mentioned that the most common question he gets from junior analysts about derivatives aren’t about understanding these complicated products, but “how much money did we make off the client?”
You can read his entire article (click here) where he even mentions hearing senior executives talk about clients as “muppets” and actually ripping clients off. He predicts that companies who care only about making money will not be able to keep the trust of their customers. But is that true?
Millions of people routinely trust their brokers and most are not willing to believe this is true about their broker. Their broker came through a trusted referral. Their broker is a “good” guy who would never care about the company (and their own personal promotion) more than about the client’s best interest. Right? Smith’s opinion about the prevalent “money first” culture of firms like Goldman Sachs really raises the question of how can even a “good” advisor survive in such an ‘clients-last’ environment. And his article seems to suggest that the chances of even getting a”good” advisor is unlikely and swiftly declining.
Do you -or your friends and neighbors- want to be a client of a firm who is regulated by a “suitability” standard or a fiduciary standard (read related blog to find out the difference)? The question boils down to: do you want to be sold investment products or do you want to be given investment advice?