Of Muppets and Men

If you watched the television show 60 Minutes on Sunday October 21st you saw the story about the former Goldman Sachs Vice President who quit via an op-ed piece in the New York Times citing concerns that the ethics of the famous Wall Street firm were deteriorating. Among the claims he made was that the firm would regularly seek out unsophisticated investors and sell them sophisticated investment products, which they didn't understand. These clients, or muppets, as Goldman employees supposedly called them, even overpaid significantly in certain cases because they didn't bother to get competing bids, trusting the firm (mistakenly) not to take advantage of them. Another allegation Greg Smith, the former employee, made was that Goldman would regularly take an opposing view on a security that it recommended to clients. Basically voting an opposite position, with corporate capital, than how their client was investing. For example, selling short (betting a stock would decline) while a client held a long (hoping the stock would appreciate) position in the same security. For its part Goldman allegedly didn't see any problem with such actions. All these allegations are bouncing around in the world of high finance, billion dollar pension funds and huge, sophisticated, financially-engineered investments, but if you think this type of behavior is unique to the streets of Manhattan, you are mistaken. One thing to consider, if you choose to engage the services of an adviser, is whether they are a Registered Investment Adviser (RIA) or a broker. One is not necessarily better than the other when it comes to the recommendations given and the performance ultimately achieved, that's something to consider on a case-by-case basis, but one thing that is very different is the standard to which each is held. First, it's important to realize that you will not be able to tell one apart from the other when it comes to titles. Both often refer to themselves as investments advisers (or advisors) or financial planners or wealth managers. Further research will have to be done to determine which they are. One give away is if they are associated with a firm like Morgan Stanley or Merrill Lynch, you are likely dealing with a broker. A broker is held to a standard known as suitability. Basically they should only recommend securities for clients that are suitable for those clients. They have no need to act solely in the best interests of the client, and, like Goldman, may take positions personally, or as firm, contrary to those recommended for you. RIAs are held to a fiduciary standard, a stricter standard (brokers would have you believe both are the same – judge for yourself). The fiduciary standard requires that the adviser act solely in your best interest, ahead of even their own. Knowing whether you are dealing with a broker or an adviser at least helps in making an objective decision. There are good and bad brokers just like there are good and bad advisers. Throughout my career I've come across far too many ‘advisers' who, while they may not call clients muppets outright, certainly don't have much regard for their best interests (this holds for both brokers and RIAs). While many people feel comfortable managing their own investments, or may be too concerned of being taken advantage of that they don't seek out help, others prefer to seek professional advice for either the convenience or the belief that professional oversight can do a better job than they could themselves. Be vigilant in who you deal with as predatory practices will not cease to exist. So long as there is an opportunity for money to be made, there will be people on the fringes of society who will try to take advantage of those less informed. But, absent a world where everyone follows the golden (not Goldman) rule a little knowledge of who you're dealing with can go a long way in helping to even the playing field… at least a little bit until the rules change again. If you're interested in learning more about the inner workings of Goldman Sachs, as told by Greg Smith, you can check out his book, Why I Left Goldman Sachs: A Wall Street Story.