Thursday, March 15, 2012

Are Large Financial Institutions our Friends or the Enemy?

I posted this article on my other blog today, From Rags to Richards, with the title, Are Financial Institutions in the Business of Screwing the Client? I think the topic is important enough for everyone to think about.

Yesterday a Goldman Sachs executive publicly quit his job. He did so in a rather spectacular manner. No private letter to the human resources department. No closed door meeting with his boss. No quiet cleaning out of his desk and, voila, one more employee quietly slips out the door.

Greg Smith let the whole world know why he was leaving the venerable financial institution. His open letter to his employer was printed on the Op-Ed page of The New York Times. It became an immediate sensation.

Mr. Smith wrote that, when he joined the firm twelve years earlier, he was proud of the firm and honored to be a member of their team. At the time, he writes, the corporate culture, “revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients.” He goes on to say that the culture radically changed. Making money off the clients is now the company’s top priority. “It makes me ill how callously people talk about ripping their clients off.”
The picture Mr. Smith describes of Goldman’s corporate culture is nothing new or shocking, except for the fact that Goldman has traditionally been considered one of the good guys.

Dealing with large financial institutions has always been risky business. Following the stock market crash of 1929 and the Depression a series of laws regulating banks and other financial institutions were passed. The goal was to make the firms safer and more secure for customers.

One of the laws, the Glass Steagall Act, established a wall between investment banking and securities trading, and commercial banking operations. Over the years federal bank regulators eased the restrictions. In their wisdom Congress repealed the law in 1999. Banks could now participate in investment banking, securities trading, and commercial activities – no strings attached. And they did so with a vengeance.

The result contributed to the financial debacle less than a decade later. But I guess that is another story. The point is that many, if not most, large financial institutions are not client-first oriented.

One of the most famous scandals, and examples of the client-be-damned attitude of many financial professionals and their employers, is the dot-com bubble. Merrill Lynch analyst Henry Blodgett is just one of the infamous scoundrels who earned a fortune convincing clients to buy stock in companies he (and his firm) knew were rubbish. He wrote glowing reports of companies to clients while vilifying the same companies in internal corporate e-mails. Merrill executives were involved in helping Enron prop up the company’s income and cash flow prior to the company’s sudden collapse. Meanwhile shareholders were clueless about back-office shenanigans.

Large financial institutions are not our friends. They never were and probably never will be. I like to bank at community banks whenever possible (we have no control over our mortgage holder, for example). Local banks may not offer as many perks and services, but their priority is not to wring every penny they can from me, either. Just last week Wells Fargo announced plans to end free checking in six states and charge a $7 monthly fee, unless account holders keep a minimum of $1,500 in their account or direct deposit at least $500 a month.

Once again I digress. The moral of the story is do not blindly follow investment advice from bank employees (who are eager to sell annuities and other high-commission securities) or other investment professionals. Do your homework and feel confident the investment meets your needs – not the financial institution’s.

My personal opinion, totally worthless of course, is that many financial institutions do not care about their clients and are definitely not our friends – especially the little guy. Walk in with a multi-million dollar account and it may be different, but most of us do not have that kind of nest egg. There are ethical, client-oriented, honest companies and financial professionals out there. Sometimes it just seems they are hard to find.


  1. The saving grace for me is that I don't have enough money to even be considered a muppet by GS. Sometimes you just get lucky.

  2. I'm with Arkansas Patti. I use Vanguard, and they seem okay in my book.

    I am also required to keep 5K in my bank in return for a free account. But I don't begrudge them that -- they do all my online bill paying, etc., for me for no extra charge. (Let's hope it stays that way.)

  3. I worked thirty years for the same institution, which required us to put 5% minimum of our salary into TIAA-CREF. I added more, and when I retired I was able to turn that money into annuities, which I will receive monthly until I die. There was no charge to me, and I am puzzled (and grateful) that I didn't ever have to get involved with any of those shysters. It is truly shameful. Thanks for shining a light on the bad guys.

  4. Greed seems to be driving so many things these days.
    We started out with a local bank, but it has changed ownership a half dozen times and is on its third name.
    I wish politicians were talking more about the economy and less about birth control and trans-vaginal probes.

  5. Good post! And do you think Goldman Sachs going public contributed further to their serving client interests even less well?

  6. Harvey - When GS went public it probably affected their attitude and point of view - unfortunately to the detriment of clients. Too often public companies are more interested in doing whatever they can to bolster short term numbers than doing the hard work of long-term strategic planning.