RETIREMENT SCAMS, STRAIGHT FROM WALL STREET (Part I): Let the Clients Beware ...

Salon has an article with a video clip of Senator Elizabeth Warren questioning financial executives during a congressional hearing. Primerica's President Peter Schneider was the target. He had been invited by Senate Republicans to help defend their opposition to financial regulations. It didn't go well. 

Schneider couldn't answer whether it was the financial industry's duty to operate in the best interest of their clients. With Schneider acting conveniently confused (or stubborn), Senator Warren cut to the chase and made the question even simpler:

Do you believe that people like these firefighters from Florida who are near retirement and have secure pensions with guaranteed monthly payments, should move their money into riskier assets with no guarantees, just before they retire?

The best Schneider could come up with was that "each situation is very different." 

What Schneider wants us to believe is that the financial world is too complex to make broad statements about customer service, like putting the interests of your clients first.

If you're as stupid as Schneider probably thinks everyone else is your head probably hurts from all the complex thinking here. So let's alleviate the pain.

If you are getting paid for a service it's your duty to put your clients interests first. Period. 

Strangely, some people on Wall Street don't seem to understand this simple principle, as the following makes clear.

LET THE CLIENTS BEWARE
Let's make this real clear. In the aftermath of the 2008 market meltdown, some of the biggest firms in the financial industry have fought to deny that their clients interests come first. 

What they've done in the past help us understand why they think this way. 

Not many know this, but it's a regular practice for market players in the industry to dip into client accounts, and then to use that money in the pursuit of company profits. While the industry refers to the practice as repo borrowing, stripped of the market jargon it's really an interest free loan from your account to the firm. 

Then we have the examples of the biggest financial firms getting caught luring clients into purchasing products that are so complex and toxic that it's hard to detect whose interests are being served, let alone if the products were built to explode down the road. 

Conceptually we can think about it this way. With the help of Goldman Sachs Greece signed derivative deals in 2001 that only kicked their financial can of troubles down the road. The Goldman Sachs escorted deals also piled on more debt, which set the table for successive bailouts that have primarily benefited the banks. 

Now ask yourself this question: Would the EU have been so receptive to Greece's Euro application if Goldman Sachs had actually served Greece's interests first - by telling them that hiding and piling on more debt wasn't a good idea - instead of serving their own fee-driven interests? 

The Goldman-Greece derivative deal earned Goldman Sachs $300 million, but did virtually nothing to help Greece. How is this good for our markets, or clients like Greece?

CONCLUDING THOUGHTS
These and other examples, make it clear that financial firms often see "clients not as valuable customers but as 'objects' for making profit."

If you don't want to believe this is the case consider the following: Current and past bankers from Goldman Sachs openly disagreed during a congressional hearing whether the firm has a duty to act in the best interests of its clients.

So, yeah, when it comes to dealing with Goldman Sachs and other financial firms on Wall Street," let the clients beware."

The Elizabeth Warren questioning of Peter Schneider makes this abundantly clear.

- Mark

Next: Retirement Scams, Straight From Wall Street (Part II): Put Wall Street in Charge of Social Security?