Who Should You Trust?
To hear Lloyd Blankfein tell it, the financial market system did its job. If it weren’t for that darn downturn in the housing market, everything would have been just fine.
True enough, the downturn in the housing market precipitated a horrific slide in valuations that snowballed into an overleveraging of epic proportions, one which had the US mints printing some $700 billion to cover the liquidity requirements of major banks and sending the US economy into the worst downturn since the Great Depression.
Despite the enormous government intervention, major corporations were flicked off the map and millions of people have been swept away from their homes. Millions of jobs were lost. Indeed, the last 2 years have been trying and extremely challenging.
Essentially, Blankfein argued that he and his 35,000 employees just did their jobs, giving the people what they wanted and harbored no responsibility to represent their own analysis or position with respect to the investments they sell.
In a heated Senate Subcommittee hearing held on April 27, the Goldman Sachs CEO argued that Goldman sold people the risk exposures they came for and were never obligated to disclose that the collateralized debt obligations (CDOs) they were packaging and selling long to their clients were the very same investments they were betting against (shorting) in their own investment accounts.
Did Goldman Sachs have the obligation to disclose this fact to their clients? Was Goldman wrong to sell billions of dollars of investment vehicles they secretly and frequently cite in emails as being what we’ll call garbage (expletive deleted and replaced)? Did Goldman break the law by not disclosing a major conflict of interest?
It’s very difficult to rationalize or justify the behaviors that played into the horrific downturn, especially when Blankfein earned a fat $9 million bonus in the same year when millions were losing their jobs and their homes — the result of the garbage (expletive deleted) assets Goldman sold and shorted.
At the heart of this case is what is Goldman permitted to do under the standard of suitability? The SEC asserts that Goldman’s conduct was not permissible. Blankfein vociferously disagrees. And the outcome may rely on answering this question? Is selling garbage (expletive deleted) investments illegal or just immoral? If the SEC determines it’s illegal, Goldman has a big problem. If it’s immoral, investors have a big problem.
We have a solution:
Close your eyes, click your heels three times, and say:
“There’s no one like a fiduciary, there’s no one like a fiduciary, there’s no one like a fiduciary.”
Fiduciaries are required to act with undivided loyalty to their clients. They are required to disclose how they get paid and reveal any corresponding conflicts of interest.
The Committee for the Fiduciary Standard states the five principles of fiduciary standard, as follows:
- Put the client's best interest first.
- Act with prudence; that is, with the skill, care, diligence and good judgment of a professional.
- Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts;
- Avoid conflicts of interest.
- Fully disclose and fairly manage, in the client's favor, unavoidable conflicts.
These are noble aspirations, ones which many big insurance companies and broker dealers would like to have you believe they are able to deliver to you, until, that is they are pressed on the issue as Blankfein was in his January, 2010 SEC hearing in which he stated, “We are not a fiduciary.” He added that Goldman must “fully disclose what an instrument is and be honest in our dealings, but we are not managing somebody else’s money.”
Unlike Goldman Sachs, IFA is a fiduciary. We willingly accept the responsibility to put our clients’ best interest above our own, and at all times, making investment recommendations that are squarely in the best interests of our clients and their ability to take on stock market risk.
We at IFA fulfill this standard for individuals, institutions, and retirement plans including 401(k), 403(b), and defined benefit plans, providing low-cost, no-load index mutual funds that carry 83 years of risk and return data.
We at IFA gladly accept this fiduciary obligation because we receive no revenue sharing and no incentives to recommend one fund over another, thereby avoiding conflicts of interest.
If there is one fundamental lesson that investors can learn from the horrible economic downturn and the fallout, it is this: always, always, always work with a fiduciary--one who will put in writing that they accept the fiduciary duty, and that they will put your best interests above their own, fully disclosing all revenue sources and potential conflicts. Doing so will give you a higher probability of success, and avoid unpleasant (expletive deleted) outcomes.
