RIAs line up behind Greg Smith as Goldman Sachs reels from exec's New York Times op-ed grenade

The world of global finance is a very confusing place now. Accelerating in complexity and speed. Like anything growing it has it’s awkward moments and fits and starts. Ideas, organizations, business models, technology and just the way people act are forced to change — like it or not.

The global financial system is not asking anyone’s permission to get very big, fast and complicated.

Our brains love certainty — actually they hate uncertainty. Not risk — risk is what our brains evolved to handle — but uncertainty triggers all sorts of fear response. RIAs know this better than most.

So a young man making a (self-justifying) and simple set of moral judgement about his former employer is refreshing and fits our own fantasies about how the world can be simple and right or wrong. It can’t. There is no maturity no nuance nor even evidence in this one piece.

How do we know what he says is true. If we are to make blanket condemnations of one of the most successful business models, organizational systems and businesses in the history of the world — is some objective evidence needed?

GS may be 100% accurate in his statements — although no one ever is. But he is still one person — one data point. Surely some RIA sees this flaw in the logic.

Why do mature professionals and journalists take one person’s word as a basis for demonizing Goldman?

Why? Because it’s simple, easy, understandable. It fits our preformed beliefs and needs to find a bogeyman. We don’t want knowledge and understanding of complicated matters — even professional ones. We want children’s fairy tales.

Right now — Gregg Smith has told one of the best going. And like all children’s tales — it makes us feel better. For awhile.

We aren’t defending Goldman. We are defending logic, reason, professional probity and judgement. Good luck with that.

Elmer,

Thank you for your well thought out response to this article and to the swirl around Greg Smith’s op-ed. You make some good points.

Still, I think you can look at this as one data point or you can look at this as one of the final pieces of the puzzle. I honestly didn’t see this as a rare, out-of-the-blue narrative about what it’s like inside a Wall Street investment bank.

I saw it as more of a cliche. Seriously. Did anyone read Michael Lewis’ Liar’s Poker? Does anyone ever read our debriefs of breakaway brokers at RIABiz? Many of them tell some version of the story told by Greg Smith — and the off-the-record comments I get are much more so.

Maybe it’s not fair that that Goldman Sachs got singled out. It’s not just at investment banks that everything is discussed in bottom line terms these days.

(But then again maybe we expect more from Goldman Sachs. They produce high level officials in our government and they handle the nerve center of our financial system.)

Of course the best way to bring about change from these circumstances is to create a better way — both financially and otherwise. The creation of a thriving RIA business is a major step in the right direction — at least at the advisor level. I have hopes that it’ll one day trickle up.

Brooke

Elmer,

You have missed all the most salient points raised by Greg Smith concerning the state of the brokerage industry which has gotten to the point where Congress has had to take action to support the consumer’s best interest, after 70 years of the industry failing to do so.

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I recall reading a wonderful white paper titled: “The Economics of Best Execution” by Professor Lawrence E. Harris, USC, who writes:

“Since retail customers generally do not know whether they receive good execution on average, brokerage firms have little incentive to demand that dealers provide good execution. If they did, they would obtain fewer order flow inducements from dealers. Instead, brokers accept relatively poor execution and use the resulting order flow inducements to lower their brokerage commissions…”

“The brokerage industry is not likely concerned about this equilibrium. From a marketing viewpoint, when deciding to trade, most customers probably give more weight to their visible commission costs than to their less obvious built-in transaction costs.”

Reminds me of a quote someone once told me, “Free trade, sure, but it’ll cost you!”

It is interesting that top industry executives say that Greg Smith’s confirmation that the best interest of the investing public is not a primary consideration of Goldman, means Smith is no longer employable in the industry. By extension, how genuine is the industry’s assertions they are interested in the best interest of the investor, when it terminates anyone who advocates the fiduciary duties of the broker.

This not only provides insight into the insular nature of our largest firms, but explains how insincere they are in even considering innovations that would advance the best interests of the investing public. This tells us the only way for Wall Street to restore the faith and confidence of the investing public is not to hope Wall Street will voluntarily support the consumer’s best interest but for the SEC to require it as mandated by an Act of Congress (Dodd-Frank) which further confirms after 70 years of neglect, Wall Street has no interest in even discussing how to acknowledge and support the fiduciary standing of the broker.

The absence of constructive, pro-fiduciary dialogue from the brokerage industry and the departure of the brokerage industry’s most coveted top advisors to the RIA model confirms Greg Smith’s Goldman observation is not an isolated incident. Every major firm can be characterized as Mr. Smith has characterized Goldman. Except now, the general public has their suspecions confirmed.

It is time the brokerage industry to actually support fiduciary standing, if not the consumer will not accept a more expensive, inferior value proposition. The RIA model in the consumer’s best interest will prevail. There is no instance in a free market where the best interest of the investing public has not prevailed.

Wall Street is on the wrong side of history and Greg Smith has performed an invaluable duty by making it clear to the consumer that their trust is misplaced.

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