Can You Trust Wall Street?
March 21, 2012
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For anyone who is a movie buff, this bombshell can be compared to the classic scenes in Tom Cruise’s Jerry Maguire and his career-killing “mission statement.” Except this time, it’s not fiction, it’s for real. When executive Greg Smith quit his job on March 14th, he declared, “The environment (at Goldman Sachs) now is as toxic and destructive as I have ever seen it.”
And this was no internal memo in which he aired his grievances. As most are now aware, he went public (very public) in his now-viral New York Times op-ed, Why I Am Leaving Goldman Sachs.
Time will tell whether Greg Smith ends up honored as a game-changing hero, cast aside as a “whiner,” or largely forgotten, like that JetBlue steward who departed his career via the emergency exit. But Smith’s observations are spot on. “If clients don’t trust you, they will eventually stop doing business with you. … People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.”
He may not enjoy lasting personal fame, but I fervently hope that the message he delivered ends up spurring a much-needed cultural shift within the financial industry. Smith’s condemnation of the leadership changes he saw during his decade at Goldman Sachs struck most of us as illustrative of a global epidemic rather than a problem at only one Wall Street firm.
It really shouldn’t be that complicated. As Susan John of the National Association of Personal Financial Advisors (NAPFA) commented in InvestmentNews, “I think clients want to know that whoever is working with them has their interests at heart, and that there’s more loyalty to the client than to the firm.”
It seems to me that this sort of dedication to investors’ best interests should be a no-brainer — regardless of a firm’s business model, fee structure or service offerings. It seems equally clear that, at least among Wall Street’s behemoths and likely far more widespread than that, it’s all too frequently not. (This blog contains a series of posts on the “dark side” of Wall Street.)
How do we make meaningful progress toward eliminating financial service environments in which, as Smith alleged, his former colleagues “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”?
Legislation can help, up to a point. But one need only look to Bernie Madoff to know that laws will only get us so far when someone is determined to break them. What’s required is an attack on all fronts. As individuals — financial professionals and investors alike — we must share a common passion for championing continued cultural, legal, procedural and educational improvements in all that we do with our investment activities.
My first recommendation is that you insist that your financial advisor promise in writing that your highest interests will come first. In legal terms, this is known as a fiduciary relationship between you and your advisor.
If your advisor won’t agree to this legally enforceable relationship with you, I would suggest you respond with a quote from another movie character, Howard Beal, excellently portrayed by Peter Finch in Network: “I’m as mad as hell, and I’m not going to take this anymore.”
I agree with your sentiments and your recommendation to only have a financial advisor who agrees to act in a fiduciary role.
Two thoughts came to my mind while reading your post:
•As Michael Douglas said in the movie Wall Street, greed is a powerful force. And, unfortunately, greed is a primary motivator for many in the financial business.
•Building on this theme, why are so many greedy people in the financial business? As Willie Sutton replied in years past as to why he robs banks, “That is where the money is.”
Arnold,
I guess most people gravitate to Wall Street, because they are fascinated by finance and economics, or they want to get rich. Maybe being surrounded by intelligent highly motivated co-workers is also a draw. They didn’t go to Wall Street to make the world a better place.
But when did short-term, screw-the-client, greed become out of control? Goldman Sachs used to admit that they were “long-term greedy” meaning that if their clients succeeded, so would they. Now it seems to be about making a lot of money in a short time and never mind what happens to clients. On Wall Street, buyer beware.
As the song says, “Money makes the world go round.” Unfortunately, these antics by institutions large and small have damaged the trust that Main Street has for anyone associated with Wall Street. And not enough consumers understand the importance and role of a fiduciary standard, especially since the majority of advisers are registered reps or insurance agents with very large, powerful lobbies.
I was listening to a radio interview today of the author of a new book on Apple who said that Steve Jobs made it very clear to his store employees that they were not there to generate sales (they are not on a commission) but to offer every customer that walked in a great experience with the salesperson and the products in the store. The goal was to attempt to “enrich the life” of each and every customer as their primary goal….the company’s bottom line would take care of itself if this was done… Care to argue with the results? Apple’s now the richest company in the world…sounds like the equivalent ot “fiduciary responsiblity” to me and that any business can take a lesson from the late Steve Jobs.
The Bernie who “Made Off” with the money reference is not the complete thought. Not only was Bernie determined to break the law, but he was more than aided and abetted by an SEC that was ‘aggressively’ not doing its job. The regulators bear a responsibility when they had multiple inputs on the scam as it was unfolding.
There were adequate laws on the books in that case. The people at the highest levels of the administration wanted to show that the regulators could do the most good by staying out of the private sector’s way. They ended up proving the opposite.
In 1971, I was working on Wall Street and I was sitting in the office of one of the partners who was ranked as one of the top 3 pharmaceutical analysts. He got a call from, I think Dan Dorfman, who wrote the WSJ’s “Heard on the Street.” The partner talked about the drug companies and then was asked his opinion of what was going to happen in the market and he expounded at length. As he hung up the phone, he said to me, “F–k if I know what’s going to happen.”
I’d already seen enough during my time in the market that this was the last straw
and I decided to get out of the business. What you say, Roger, about “never mind what happens to the clients” is nothing new, not for Goldman, not for other firms. It was always make money first and screw the clients. Have you never participated in an IPO that was best used as a fishing sinker that some firm just pushed out the door just so they could collect the huge banking fees? Yes, “caveat emptor!”