“Client Last” Advice – The New York Times OpEd That Scorched The Industry

David B. Armstrong, CFA Weekly Market Commentary

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The following is a piece by Bob Veres (disclosure – slightly edited for compliance purposes, we just can’t go around posting anything we want these days…) that we thought was worth sharing.  It illustrates what’s wrong with a big component of our industry – the big firms.  It also reminded us of an analogy we heard the other day that compared a baker to a nutritionist.  We can’t claim credit for it.  It goes like this.

The baker will sell you great cake, in fact he may have the best cakes anywhere.  But he’ll never offer you fish, even if he thinks it’s healthier…even if he thinks you are overweight.  Because he only sells cakes.  A nutritionist will advise you on a well balanced diet, complete with all sorts of different components of a healthy diet.  The nutritionist is paid to give you advice on your overall health, the baker – even the best ones – get paid when you buy a cake.   If the nutritionist suggests cake in your diet, use your favorite baker.  Just don’t expect the baker to recommend veggies from the farmer’s market, meat from the butcher or fish from the fishmonger.

Now for Bob’s piece.


Whenever advisors get together, we often talk about a “client-first” attitude, which is shorthand for giving clients the same quality of financial advice as we would give our families.  It’s a useful shorthand way to navigate through a financial world that is still beset by the potentially inappropriate use of incentive payments, expensive rewards for sales production, under-the-table or soft dollar incentives and a host of other ways that some product vendors may try to buy their way into your portfolios.

“Client-first” simply means that the client’s financial success and well-being comes before all other considerations.  It’s what you would expect from a doctor or other professional, and many of us believe that you have a right to expect the same level of care from your financial advisor.

Some professional advisors think this is all a bunch of baloney.  Some Wall Street firms and sales organizations are very good at keeping the profits they skim off the top when you take their recommendations.  This is why it was so startling when, in a New York Times opinion piece, Greg Smith essentially pulled the curtains back and showed how Wall Street may really work at some firms, in his opinion.

Smith declared that he was resigning from a venerable brokerage firm–perhaps Wall Street’s most highly-respected organization–because, in his view, its culture is all about putting the client’s interests last.  “To put the problem in the simplest terms,” he writes, “the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.”

Pulling the curtain aside a bit further, he said that the criteria for promotion and success was not “leadership” or “doing the right thing.”  Instead, he said, “If you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.”

How do you make money for the firm?  Smith outlined three ways.  A broker or executive can rise in the ranks by “persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit.”  (Just what you want to buy for your retirement portfolio, right?  Or, alternatively, “get your clients–some of whom are sophisticated, and some of whom aren’t–to trade whatever will bring the biggest profit to [firm name].  Call me old-fashioned,” said Smith, “but I don’t like selling my clients a product that is wrong for them.”

Pulling the curtain back still farther, Smith said that “It makes me ill how callously people talk about ripping their clients off.  Over the last 12 months, I have seen five different managing directors refer to their own clients as ‘muppets,’ sometimes over internal e-mail…  Will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals?  Absolutely.  Every day, in fact.”

He said that the most common question he gets from junior analysts about derivative investments is: “How much money did we make off the client?”  He wonders what the effect will be on that junior analyst who sits in the meeting rooms hearing senior executives talk about “Muppets,” “ripping eyeballs out,” and “getting paid.”

You can read Mr. Smith’s comments in their entirety herewhere you will also see a nice illustration of vultures at feast.  He predicts that companies–and people–who care only about making money will not be able to keep the trust of their customers.

But is this true?  Chances are, most people reading this eye-opening article will be hearing about these things for the first time, and may not believe it could potentially be true about THEIR broker.  Millions of people routinely trust their brokers and the big firms never seeing this messy view that may potentially be on the other side of the curtain of some firms, unknowingly chipping in their retirement dollars to the outsized Wall Street bonus pool of that firm.

You find yourself wondering: who’s going to tell those “muppets”–your hard-working friends and neighbors–that their broker may be quietly, invisibly, cleverly putting their interests last?

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

About the Author
David B. Armstrong, CFA

David B. Armstrong, CFA

David B. Armstrong, CFA, is a President and Co-Founder of Monument Wealth Management. Along with his role as the firm’s chief investment strategist and portfolio manager, Armstrong is viewed as an industry leader in several areas including innovative practice management, discretionary asset management, digital marketing and social media. Dave is the writer of Monument Wealth Management's weekly "Off the Wall" Financial Blog and Market Commentary, and is frequently sought after by journalists and event coordinators. Visit his full biography here.

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