The Goldman fallout forces us to ask: Can a public company’s profit-driven model accommodate putting clients’ interests first? Does it even have that in its DNA?
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Wall Street firms and independent RIAs
are not the only ones talking about the Goldman incident—advisor Greg Smith’s scathing resignation. Clients are talking about it, too.
Public companies have a different focus from private ones. They have public shareholders who want a monetary reward. Private companies focus on providing a service. Profit from service provision is a natural byproduct.
Public companies must file quarterly profit reports. Public reporting of profits versus putting client needs above profits: this is an inherent conflict of interest.
Is it a conflict which can be overcome? The brokerage firm model has changed faces radically over the last decade—actually, starting in the mid-90s. The big firms lost margin significantly as technology supplanted gatekeepers to information. Commissions lost their shine. People were no longer willing to pay for information they could access on the internet for free.
To boost margins, firms needed to attract clients with larger assets. The family office was the model of choice; it was a model only the very well-heeled could afford. So brokers were no longer brokers. They became financial advisors or wealth management consultants. Over time, as family offices have struggled to retain best-of-breed talent, the big firms have tried to take up the slack. They have employed the family office label as a marketing tool.
The once-golden fee-based separate account consulting model has also fallen short of addressing the needs of the wealthy. The big firms have notoriously tried to apply institutional models to address the needs of individual clients. This does not work.
Individuals have different needs than institutions. They do not have the staying power institutions have for riding out market volatility. They have tax issues institutions do not have. They have emotions tied to money and to businesses they have created. And they have family issues, behavioral biases, and generational biases which influence their investment decisions.
Individuals often also have families. They have a total wealth picture which requires integrated management of multiple forms of wealth.
Many big firms have tried to set up—or more often have bought—multi-family offices as separate arms or subsidiaries in their efforts to attract higher net worth clients. Others have developed private wealth management groups to offer a separate, higher-tier offering. Yet both clients and advisors are leaving the big firms at an increasing rate. These marketing efforts have not bred stickiness and loyalty.
Why? Could it be this underlying conflict of interest? Is it possible for an advisor at a big firm to truly put the interests of his or her clients first?
Can a firm which has to report profits on a quarterly basis morph its business model to effectively put clients’ interests first? Can it do that and still keep shareholders happy? How will new regulations affect the shape and scope of service provision going forward? Are the hugely successful business models of Apple, Google, and Facebook applicable in some fashion to the advisory industry? Will a new business model emerge on Wall Street?
The Goldman incident has Wall Street firms scrambling to answer these questions. Looking at these issues may also help independent advisors tweak their business models more effectively. We invite your comments on the viability of a profit-driven model seeking to provide services that make clients stick.