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Wall Street’s Dirty Little Secret

03/16/2012

On Wednesday, a disgruntled employee wrote an open letter of resignation to the legendary Goldman Sachs which appeared on the Op-Ed page in the New York Times.  Since then, Wall Street has been obsessed with it.

Goldman Sachs has a long, storied history as an investment firm on Wall Street.  They were always considered “the smartest guys in the room.”  They were feared by other firms.

However, the disgruntled employee claims Goldman Sachs has lost its moral compass, that the pursuit of profit is the ONLY thing that matters, that clients are mere “muppets” to be fleeced and fooled, and that this became the corporate culture during the reign of the current CEO, Lloyd Blankfein.

Do I believe this?  Absolutely!

While I have long been critical of the firm and frequently referenced its reputation as a Vampire Squid on the face of mankind, I do have respect for their research.  But, I have never trusted them.

It would be a mistake to assume, however, that Goldman Sachs was the only ethically-challenged investment firm.  When I started in banking decades ago, my annual bonus reflected whether the boss liked me or not.  Then, some management consultants read some Ayn Rand books and argued that people are motivated by money.  (In fairness to Ayn, she never said people are motivated “solely” by money.)  With that intellectual basis, compensation plans were changed.  It had the desired effect, changing the service culture of banks into a sales culture.  It also changed banks from being customer-centric to becoming self-centric.  And, it was painful to watch.

There are a good many people who have been unemployed for four years, sitting on the beach somewhere sipping drinks with tiny umbrellas, who made millions selling the toxic sub-prime mortgage-backed-securities.  All they did was work their incentive plans.  Its not their fault they helped send the American economy into the worst recession since the Great Depression.  They put “lipstick on the pig” and put the pigs into client portfolios.

The moment of truth for me came when I was told to put “structured products,” which I refer to as neutron-CDs, into client portfolios.  I soon learned there was another operating model, where putting the client first was not mere lip-service, like it is with ALL investment houses, but is actually a legal requirement, enforced by the courts, i.e., a Registered Investment Advisor or RIA.  That legal responsibility is called a fiduciary responsibility, where my highest obligation is the best interests of the client.  Stockbrokers do not have that responsibility.

I’m proud to be an RIA and don’t understand why anybody does business with stockbrokers at investment firms like Goldman Sachs.

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