Greg Smith, the former head of Goldman Sachs’ European derivatives desk took out his former employer with the efficiency of a hitman. His op-ed piece in the NY Times titled,“Why I Am Leaving Goldman Sachs”, took aim at not only the culture of the firm but CEO Lloyd Blankfein. The article contained a number of salacious anecdotes but the most brazen was that on five different occasions he heard Managing Directors call their clients “Muppets”. Clearly, what they meant to say is that their clients were puppets and would buy anything being sold or pushed to them by the brokers at Goldman. In my view, the almost hostile way in which Goldman treats its clients is not atypical among Wall Street firms. On any given trading day you’ll probably here worse names being used to refer to clients on Morgan Stanley’s or Deutsche’s trading desk. I think the attitude towards customers is endemic to Wall Street, what was surprising was how Greg Smith chose to air out his grievances publicly. Barry Ritholtz at the Big Picture takes a similar view. My first real job in college was working at a small brokerage firm called Dean Witter, which was subsequently bought out by Morgan Stanley. It was my first real lesson that a retail broker is in no way looking out for your interest as a client. His first and primary goal is to make a sale. A broker doesn’t care whether you make or lose money as long as you are trading through him. Even as a professional investor that had institutional sales coverage from all the major wall street firms, I never forgot that lesson I learned early on in my career. However, I can’t claim that my institutional salesmen didn’t provide value. A few whom I trusted did truly attempt to provide me with beneficial advice and investment recommendations, because they took the long-term view that building a client relationship was more important than just a single trade. Unfortunatley, based on my experience the professionals who took this view proved to be the exception and not the norm.
I’m bringing up this point to emphasize that at the end of the day only you as an invidual are responsible for managing your money as a retail investor. You should always view any recommendations made by your broker with skepticism because your interests are not aligned. Your broker will make money when you both buy and sell a security. Whether you make money or lose money doesn’t matter becuase he gets paid either way. Thus, his incentive is to increase your trading. Part of the reason why I chose to launch the Value Investing India Report was to provide unbiased stock research for investors. I only get paid on the basis of my stock recommendations. Thus, I have every incentive to make sure that I make accurate calls otherwise there would be no way I would be able to retain clients. My interests are aligned with my subscribers because I want to build a long-term relationship and have no way of monetizing on your trading activity. At the end of the day you must choose your investment advisor wisely and ensure that your interests are aligned.