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A Wall Street Tale: Of Muppets and Men

April 17, 2012

(Reprinted from the May 2012 edition of the Bath Country Journal.)

By  Kevin Kroskey, CFP®, MBA

Of Mice and Men was one of the first books I actually read cover to cover. According to author John Steinbeck, the book’s title came from a poem by Robert Burns that contains a line that translates to, “The best-laid schemes of Mice and Men often go awry.” I thought back to this book when reading the startling letter of resignation by Goldman Sachs executive director Greg Smith published in March in the New York Times as an opinion piece. Smith essentially pulled the curtains back and showed how Wall Street really works.

In professional circles, financial advisors often talk about a "client-first" attitude, which is shorthand for giving your clients the same quality of financial advice as you would give your own mother. It's a useful way to navigate through an opaque financial world that is still beset by incentive payments, expensive rewards for sales production, under-the-table or soft dollar incentives and a host of other ways that product vendors try to buy their way into your portfolios. 

"Client-first" simply means that the client's financial success and well-being comes before all other considerations. It's what you would expect from a doctor or other professional, and many of us believe that you have a right to expect the same level of care from your financial advisor. However, Wall Street firms and sales organizations are very good at hiding the real agenda behind their advice, and do a masterful job of hiding the profits they skim off the top when you take their recommendations. 

Smith declared that he was resigning from the venerable brokerage firm--perhaps Wall Street's most highly-respected organization--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." He said that the criteria for promotion and success were 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."

How do you make money for the firm? Smith outlined a few 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." (Just what you want to buy for your retirement portfolio, right?) 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. Call me old-fashioned," said Smith, "but I don't like selling my clients a product that is wrong for them."

Smith continued, "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.' 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."

Smith predicts that companies--and people--who care only about making money will not be able to keep the trust of their customers. “If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.”

But is this true? Chances are, most people reading this article will be hearing about these things for the first time and may not believe it's true about their broker. Millions of people routinely trust their brokers and the big firms that buy advertisements during the final round of a golf tournament on Sundays and never are privy to the behind-the-scenes view Smith provided. 

Ultimately, culture is king and will influence behaviors and beliefs at the workplace. As in Greg Smith’s case, an intense conflict was created with firm’s culture being at odds with his own integrity. While some may criticize Smith for writing his resignation letter as he did, it took courage not to conform and to struggle to maintain his integrity. For many if not most, it would have been much easier to conform to the “client-last” culture.

I can only hope that this Wall Street Tale goes awry. I hope that an educated consumer will take a serious look at the conflicts of interest so often prevalent in an advisory relationship. I hope that laws are passed in the U.S. as they have been in Australia and the United Kingdom where advisors legally must place the interest of the client before their own, acting as a fiduciary on their client’s behalf. 

Until then you may find yourself wondering: who's going to tell those "Muppets"—yourself, your hard-working friends and neighbors--that their broker’s firm and quite possibly their broker is quietly, invisibly, cleverly putting their interests last? 

You can read Mr. Smith's comments in their entirety here.

(This article was prepared by Bob Veres and Kevin Kroskey.)

Kevin Kroskey, CFP®, MBA is President of True Wealth Design, an independent investment advisory and financial planning firm that assists individuals and businesses with their overall wealth management, including retirement planning, tax planning and investment management needs. Kevin can be reached via email at kkroskey@truewealthdesign.com or by phone at 330-777-0688.

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