The recent appearance in Congress of several Goldman Sachs executives was great theater. The evasion of one particular question was especially noteworthy:
Senator Collins: “...could you give me a yes or no to whether or not you considered yourself to have a duty to act in the best interest of your clients?”
Former Goldman Employee: “I believe we have a duty to serve our clients well.”
The same question was directed to a current Goldman Managing Director. The response was: “I believe it’s our responsibility as market makers to provide market level bid and offer to our clients and, um, to serve our clients in helping them transact at levels that are fair market prices and help meet their needs.”
Senator Collins: “You know, your clients are not paying you big fees just to efficiently conduct transactions...they are paying you for judgment as well.”
Actually, the Senator is mistaken. When a brokerage firm acts as an agent on a trade, it is not being paid for judgment – it is being paid for trade execution and it is not required by law to act in the best interest of its client. In legal terms, the broker is not required to act as a fiduciary.
What the Senate committee cannot seem to understand is that Goldman, in acting in its own best interests in this case, did not violate the standard operating procedure of Wall Street. Market-making has nothing to do with advice, and market-making activities often place a brokerage firm directly at odds with the best interests of its clients.
Institutional investors understand this point very well and this is why they approach the brokerage firms with caution. Unfortunately, individual investors often fail to recognize the distinction between a broker and a fiduciary.
When a broker or insurance agent recommends the purchase or sale of a commission-based product to a client, he is not acting as a fiduciary. While his recommendation may happen to be in the best interest of the client, it is not legally required to be so.
In contrast, mutual fund managers and registered investment advisors, like Heritage, are required to act as fiduciaries. We are required by law to act in the best interests of our clients at all times and to put the interests of our clients ahead of our own.
The Congressional debate and upcoming vote on financial reform will continue to provide entertainment; some will be comical and some tragic. We will provide periodic updates as the story progresses.
As always, we welcome your questions, comments and suggestions for future topics. |
