Greg Smith, a former executive director of investment banking giant Goldman Sachs, recently wrote an op-ed piece in the New York Times where he said that several managing directors of the company commonly referred to their clients as “muppets” (which is slang for “stupid people” in Britain, where Smith worked). When discussing the culture at Goldman, Smith said: “To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.”
Smith also talked about how he thought employees advanced their careers at Goldman: “What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.”
Finally, Smith said: “I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.”
Frankly, the arrogance shown by some of the larger financial institutions comes as no surprise to us. A primary reason why we founded The ETF Store was to provide everyday investors with an alternative to the money grabbing ways of larger brokerages pushing investment products simply because they get paid on them, all while demonstrating a bigger concern for their own financial future than yours. But while Smith’s op-ed piece most certainly painted larger financial institutions in a negative light, the fact of the matter is that any size investment management or advisory firm might attempt to take advantage of you. So, the question is “how do you avoid becoming someone’s muppet”?
A recent article on Marketwatch.com provided an excellent roadmap on how to protect yourself from becoming a “muppet”. The main takeaways from the article include:
- Use RIAs instead of brokers. The key point here is that RIAs have a fiduciary obligation to put your interests ahead of theirs.
- Use index funds instead of actively managed funds. Index funds are typically much cheaper than actively managed funds and you also don’t suffer the common underperformance of actively managed funds.
- Use independent custodians to hold your investments. This ensures that you are the only one who can access your funds and can also reduce the risk of fraud.
At The ETF Store, we are setup as an RIA, we use passively managed index ETFs in our client portfolios, and our clients’ investments are held at independent custodians Charles Schwab and TD Ameritrade. This is all by design. A muppet to us is Kermit the Frog, not our valued clients.
