The Goldman Sachs Confession: "Client-Last" Culture

Mar 19, 2012 Willow Creek Wealth Management Posted in Articles

Goldman Sachs - A Portrait of a "Client-Last" Culture

Clearly the magnitude of this insider’s “outing” makes it a great news story. But what motivated us to make a blog posting about something that is already widely perceived as the norm by industry professionals, is the shock it must be to millions of Americans who invest with Wall Street brokerage firms. Firms such as Goldman Sachs are especially good at hiding their real agenda behind their advice. Now the “venerable” Wall Street firm has been scrambling to counter Mr. Smith’s revelations since he “pulled back the curtain” via the Times. As an independent Registered Investment Advisor, we often find ourselves explaining the difference between a client-last versus a client-first (fiduciary) attitude. It isn’t hard to understand the concept. The difficulty lies in identifying the players. The problem is that all "financial advisors" are not registered fiduciaries. As ex – Goldman exec Greg Smith points out, many Wall Street advisors don’t see the value in putting the client first. "Client-first" means that the client's financial success and well-being comes before all other considerations. It's the fiduciary responsibility you would expect from a doctor or other professional, and we believe that you have a right to expect the same level of care from your financial advisor. Regardless of whether Smith’s accusations are all true, the point is that Wall Street has become focused on what’s in it for them and investors have unknowingly gone along for the ride. Here are some of the Goldman “confession” highlights:

Goldman Sachs NYT Opinion Editorial Highlights:

1. "To put the problem in the simplest terms," Smith writes, "the interests of the client continue to be sidelined in the way the firm operates and thinks about making money." 2. Promotions are not garnered by merit, but profit: "If you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence." 3. In order to make money for the firm, a Goldman employee has a few options:

  •  "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."
  •  "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."

4. Perhaps the most upsetting of Smith's revelations was: "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." You can read Greg Smith's comments in their entirety here. He predicts that "people who care only about making money will not sustain this firm — or the trust of its clients — for very much longer." We agree. In an age where trust is eroding, and the financial world is increasingly difficult to navigate, investors need to know where to get honest answers and transparent recommendations.