That is why our fund is focused on transparency and clarity of investment and return. Aivars Lode
By Darla Mercado
March 18, 2012 6:01 am ET
When midlevel Goldman Sachs executive Greg Smith blasted his firm publicly last week for what he deems its rapacious behavior toward corporate and institutional clients, many retail advisers whose résumés include wirehouse stints nodded in recognition.
Goldman Sachs & Co.
His New York Times Op-Ed piece struck an emotional chord with many of them who recalled relentless sales pressure.
“During the last 30 days that I worked at a brokerage firm, I received 25 e-mails from my branch manager on why every one of my clients needed to have [some] new proprietary mutual fund,” said Bob Rall, a fee-only adviser at Rall Capital Management and a veteran of Prudential Securities Inc.
“Everything was about the YTB on the product — the yield to the broker — not the yield to the client,” he said.
WAKE-UP CALL
Russell G. Thornton, a vice president at Wealthcare Capital Management Inc. and a Merrill Lynch alumnus, agrees.
“Within the commission and sales environment of the wirehouse world, the general operating principle is: "How can I sell the most stuff to my clients?'” he said.
Although Mr. Smith's frame of reference reflects the institutional market, some advisers hope that his Op-Ed will be a wake-up call for clients, getting them to demand better quality of service they receive from advisers.
“One thing this ... will certainly do is make the idea of a client-first duty of care harder to ignore,” said Michael Branham, an adviser at Cornerstone Wealth Advisors Inc. and 2012 president-elect of the Financial Planning Association.
“Regardless of your legal obligation, it makes business sense to put the client's interests first,” he said. “Whether it's [The Goldman Sachs Group Inc.] or a small independent broker-dealer, that's what clients are really asking for.”
Some of the media coverage declared that advisers' true loyalties are to themselves and their firms, not their clients.
“A blazing resignation at Goldman Sachs shows us once again that financial advisers too often put their own interests first,” blared a sub-headline in an article posted last week on Time magazine's website.
Some advisers think that they are far enough from Wall Street so that the Op-Ed won't spur clients to question their commitment.
But others said that all the attention the Op-Ed generated only made a stronger case for highlighting the distinction between advice from a fiduciary and product information from a sales representative. If anything, it gives the public a hint of the battle brewing in Washington over from whom a fiduciary standard of care should be required.
CLIENT LOYALTY
“I think clients want to know that whoever is working with them has their interests at heart, and that there's more loyalty to the client than to the firm,” said Susan John, chairwoman of the National Association of Personal Financial Advisors.
“In the world of Greg Smith, the affected clients are institutional and presumed sophisticated — they should know and understand the rules of the game,” said William L. McCollum, a portfolio manager and chief compliance officer at Eagle Financial Management Services LLC.
“To the retail client, the revelation of conflicts of interest may come as a surprise: They have been misled to believe that their interests come first, when in most cases, there exists no fiduciary relationship,” he said.
“These firms and their representatives should not pretend to be something they are not,” Mr. McCollum said.
But other advisers think that the basic tenet of doing what is best for the client transcends business models. In other words, fee-only service arrangements aren't the only way to do right by the customer, because bad apples can turn up among those advisers, as well.
“The whole fiduciary thing has been blown out of proportion, and ultimately it boils down to trusting someone,” said Mr. Thornton, who describes his fee-only business model as “not better, but different” from his previous commission-based work.
“There were people I didn't like and didn't trust at Merrill, but I also know fee-only people who I don't truly trust or understand. Bernie Madoff should have been a fiduciary, and he was the worst.” Mr. Thornton said.
“If you do what's best for the client, you still make money — but that's long-term, as opposed to short-term,” said Rick Peterbok, chief executive of Interactive Financial Advisors, a dually registered firm. “If you do more to help the client, the rest will be OK.”
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