People are missing the bigger picture amid all the brouhaha about former Goldman Sachs employee Greg Smith’s very public resignation letter: All full-commission stockbrokers are legally allowed to sell you junk to their profit.
Smith’s dis of his former employer as a corrupt entity where brokers routinely played both sides of deals with customers that they contemptuously referred to as ‘muppets’ has garnered much attention.
Behind the Goldman Sachs brouhaha
Back when Goldman Sachs was bailed out, it emerged that the brokerage house sold known junk investments at the same time that it was betting those investments would fail. So Goldmas Sachs was lying to customers, and then making money when they steered customers to bum investments.
The problem remains that when you do business with a full-commission investment house, they have no ‘fiduciary responsibility.’
Much like full-commission stockbrokers, insurance salespeople are also exempt from fiduciary responsibility. If you’re not familiar with that term, fiduciary responsibility simply means your interests must be put first in all business dealings — and sadly they’re not required to do that.
Let’s say you go to a full-commission stock brokerage. They’re allowed to do what helps themselves first as long as the investment they put you passes a test of generally suitability for you. So if, for example, it would be great for you to own a stock fund, the full-commission broker can pick the most expensive, lowest-performing stock fund for you if it earns them a bigger commission. Even if that investment financially harms you!
Now, a word in defense of all full-commission stockbrokers. It is possible to find honest people working at full-commission houses who will put your interests first as a customer, even though they have no legal obligation to do so.
Just know this: Just because somebody seems like a swell guy or girl and has a great personality, it doesn’t mean they’re looking out for you. They may be lining their pockets first and you’re left with the crumbs.