Goldman Sachs – Not the Real Problem

The current accusations and the resulting investigation into Goldman Sachs are very disturbing. The accusation alleges that the company created a product that it knew might fail, then sold the product to investors as a “great investment,” but allowed some of its preferred investors to short (bet against) the same instrument. When the product failed, the clients holding the short positions made a lot of money, while the other holders were left with nothing. The SEC’s issue is that the clients who lost money were never told of the risks in the investment.

While this is a very simplistic synopsis of the situation, and there are certainly more details to be heard from the defendants, there was a very interesting exchange yesterday between Lloyd Blankfein, the President of Goldman Sachs, and a Congressman. The Congressman asked Mr. Blankfein if he thought that his firm should be acting in the best interest of its clients. Mr. Blankfein paused for a great deal of time and then simply answered with a vague, “We do what we can” answer.

Mr. Blankfein could not answer “Yes” to that question because financial institutions like Goldman Sachs, Bank of America, Edward Jones and AG Edwards cannot legally accept fiduciary responsibility for their actions. Fiduciary simply means to always act in your client’s best interest and to disclose all conflicts of interest. Was there a conflict of interest in this Goldman Sachs product? You bet.

Part of the problem here is that the government allows companies like Goldman and other brokers to act under suitability rules. This means that a client has to be suitable for the investment, but does not mean that the product is the best for the client. To give you an idea of what this means, think of a mortgage. You might be qualified to get a million dollar mortgage, but that does not mean it is your best interest to have one.

I believe that anyone acting under the title “financial advisor” should be held to a fiduciary responsibility, just like your doctor, attorney and even your real estate agent. Brokers, commonly called financial advisors, do not give advice! They are not in the business of giving advice-they are in the business of representing products and completing transactions.

The problem with financial advice comes down to this fact:  advice should be paid for separately from products and products should not pay the advice giver. And guess what, the overall cost of paying for independent advice will most certainly cost less than the expensive products being sold to you.

Brokerage houses have a lot of power in lobbying to Washington and have thus far kept themselves out of being fiduciaries to clients.

Currently, the only fiduciary advisors are independent firms that are not associated directly with any broker dealer, but rather a custodian like TD Ameritrade or similar. TD Ameritrade holds the client’s assets that are being managed, but the advice comes from an independent advisor hired by the client. Fee Only Independent advisors are regulated by the SEC or directly by individual states. Fee only advisors have the entire financial product world available to them, thus they can and should always act in a client’s best interest. If they do not, there are serious consequences. In comparison, the broker can get off scot free, just like Goldman Sachs probably will.

By Published On: April 28, 2010

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