“Where Are the Customers’ Yachts?”

This is the title of an investment classic written by Fred Schwed in 1940 (more than 70 yeas ago) about the “sales culture” of Wall Street Banks, a culture that always puts profits ahead of client interest.   Last month when Greg Smith resigned from Goldman Sachs and wrote his opinion piece for the New York Times, my first thought was, why did it take him 12 years to figure this out?  I am happy for him but his disclosures are not going to change anything at Goldman Sachs or anywhere else on Wall Street.  The money is simply too good to pass up.  Personal ethics will almost always be trumped by the desire for big money.  I can speak from my own personal experience with Merrill Lynch back in the mid 80’s and over the next few days I will write about some of the most egregious examples of client abuse I witnessed.  Of course, I was working in the trenches with retail clients where the abuses occur daily whereas Greg was working with large institutional clients who were more sophisticated.  A more difficult target, but a target for exploitation, nonetheless.

Last summer I spoke to a group of high school seniors interested in a career in financial services at a “career day” function and I began by asking, “how many of you want to be sales people?”   Not one student raised their hand so I asked them why they were attending this session.   We then discussed what they thought a career in financial services entailed.  All of them wanted to help people with their investments, and had no interest in being a commissioned sales person.  I shared with them my experience and told them it was not all bad news.

They could have a career in financial services and put the clients’ interest first if they were to join a small but rapidly growing profession called “fee-only financial advisors.”  These professionals are compensated with fees paid to them by the client, not commissions paid to them by their employer.  This means the client is getting objective advice and not a sales pitch.  By the end, I do not think I have ever had a more appreciative audience.  They were gratified to hear the truth.

As I said before, the culture on Wall Street will never change.  The money is too good.  But unlike 30 years ago investors do have a choice, and do not have to work with the Wall Street Banks.  There are fee only advisors all over the country now offering a more successful investment experience.

The Wall Street Banks spend a fortune in advertising and PR to convince investors they are skilled and ethical.  And they have been successful.  But since 2008, it has been more difficult because what investor would want to have their money with a firm that could not manage their own money successfully.  Now they want you to trust the “New Merrill Lynch” which is now part of Bank of America.  But rest assured, as Greg Smith documented in his letter to the New York Times, nothing has changed.

Note:  It’s not just Merrill Lynch and Goldman Sachs, the Wall Street Banks are all the same.  But my own experience was with Merrill and where I came to know the truth about Wall Street.

3 Comments

Filed under Investments, Investors

3 responses to ““Where Are the Customers’ Yachts?”

  1. My own experience was with Pru-Bache where I came to know the truth about Wall Street. I had to start my own company to try a new idea and was fortunate enough to find DFA and Dan Wheeler in 1989. I am sure I have witnessed all the egregious examples you will disclose over the next few days.
    Good luck Dan.

  2. The growing number of fee only investment advisors has become problematic for Wall Street Banks. In Wall Street’s most recent efforts to eliminate the fee-only threat, they have successfully lobbied through FINRA, SIFMA and NAIFA to get Rep Bachus to introduce a bill that would create an SRO for investment advisors. If the bill becomes law, FINRA may be the overseer and will likely make it extremely difficult for fee-only fiduciary advisors to compete effectively.

    Rep Bachus and the lobbyists claim that Madoff happened because the SEC failed in its duties. But they never tell you that FINRA had surpervisory responsibilities for two decades before Madoff was required to register with the SEC.

    To protect the public and ensure investors have a true alternative to the sales culture, please contact your member of Congress and ask him or her to oppose the bill as it is proposed currently.

  3. Hurray for articles and business models like this! I, too, am a refugee from the commission-junkie world of retail brokerages. My former firm touts to this day its JD Powers awards and its reaching out to the smaller investor. Yeah. Right. A case, perhaps, of the cure being worse than the disease? A lot of what I witnessed happening to trusting clients was just slick salesmanship. A lot of the est just made me angry for its lack of ethical service to client best interests. This, all justified under the mantras of profitability, job-preservation, trip awards, and hype. Bull.

    I appreciate your pulling back the curtain, so to speak, for the career day attendees about what they can expect from the retail financial industry. I can only hope they appropriate the knowledge you tried to share with them.

    I preach FEE-ONLY and FIDUCIARY to retail salespeople whenever I meet them, but even they who hold licenses and training seem to find the distinction an obscure one. Could this be due to tunnel blindness or does the idea hit too close to the truth? In my case, I doubt if I would have ever harkened to the words of Dan Solin, Markowitz or DFA had it not been for my lengthy “education” with Wall Street firms and what became an inevitable trek down a deep. dark hole for which I saw no light at the end.

    Thankfully, I am now happier (and healthier) as a fee-only guy, and so are my clients.

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