Does Your Investment Firm Look after Your Interests?
What a way to quit.
In a breakup rivaled only by a Kardashian, Greg Smith, now an ex-Goldman Sachs executive, parted ways with his firm in an op-ed in the New York Times that bashed practices of the firm to seek profit before client interests.
While the story of Wall Street firms placing their interests above their clients seems to be en vogue lately, the real story here isn’t that Mr. Smith believes his firm does not act in its clients’ interests alone – we’ve known that to be the case from the many years of mutual fund fraud, emails of firms pushing valueless tech stocks, and mortgage backed securities – but that large, institutional investors, if Mr. Smith’s charges are correct, are just as able to be swindled just the same as individual investors.
I don’t know enough about the world Mr. Smith worked in to know why he would believe supposedly sophisticated investors allow themselves to be taken advantage of. Perhaps many simply wanted to have Goldman Sachs manage their assets because they are Goldman Sachs. While we all know their reputation for investment stewardship lately, it is one thing to despise their actions and entirely another to have them on your team. That was a common theme among Madoff victims – sure something doesn’t pass the smell test, but it’s some other schmuck that’s being burned, not me.
So, as an individual investor, how can we know who to trust to work for our interests?
Unfortunately, there is no bulletproof way to guarantee your advisor doesn’t have other motives than your best interests. The missing pieces in my opinion are education and competition. Our retirement providers and government regulations have given us a system that locks away your funds in a monopolized account, and requires your employer to enter the investment business at the risk of being sued for their (and your) investment decisions. I’ve written regularly about how our regulators could instantly release the stranglehold Wall Street firms have on our retirement system by providing independent education and increased competition. Instead, our government lately looks for ways to dictate new ways to transfer your funds to the largest brokerages and insurance companies, rather than allowing individuals to seek competent, independent advice.
Hiring a fee-only advisor for a second opinion is a great way to get a fresh take on the strengths and weaknesses of your current investment plan. Advisors who commit to industry groups like NAPFA demonstrate competence through peer-reviewed financial plans, ongoing continuing education, and, most importantly, an acknowledgement of fiduciary responsibility to act in their clients best interests. Fee-based advisors may seem to be independent, but they still have a third master to serve. A former employer of mine described his advice as being a mix of: “what’s good for the client, what’s good for the broker, and what’s good for me.” Being a fiduciary, at least in theory, eliminates the last two conflicts.
Regular second opinions should be sought at any recommendation by your advisor for large scale changes that are recommended by your broker-advisor (moving your money to a new product, rolling over your 401(k) at retirement, etc.). If you really feel a high profile firm is the best place to investing, at least having an advisor who is trained in more than selling an investment product may provide additional insights on your overall financial plan, if not the investment plan (see here for an illustration on how an investment provider may ignore important pieces of your financial plan).
Greg Smith put into writing the reason for independent financial advice. Hopefully some good will come from saying publically what we all know to be the case. Somehow, even in embarrassment, Wall Street firms rarely lose however; no matter how much their investors may.
The preceding blog was originally published by Forbes. To view the original blog please visit our blog at Forbes. http://www.forbes.com/sites/feeonlyplanner/