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The Goldman Sachs Letter and You

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The letter from a resigning Goldman Sachs executive has become quite the Internet rage. Most of us will never deal with Goldman Sachs and the letter may seem to be nothing more than an interesting “rant”. But, is that necessarily true? Maybe not.

The letter spends a fair bit of time talking about how Goldman doesn’t always act in the client’s best interest. If you have someone giving you investment advice, are they acting in your best interest? It depends. Again, let me reiterate, most of us will not be dealing with an investment bank like Goldman and investment banks sometimes actively take positions opposite their client. Since most of their clients are sophisticated investors (pension funds, insurance companies) the risk is pretty well known and accepted. In the case of individual investors a similar situation exists, and if you don’t know the relationship with your advisor (or pay close attention to all the fine print) you may be assuming that your advisor is required to act in your best interest, when maybe they aren’t required to do so.

People and businesses that provide financial advice are governed under different parts of the law. Now, before I explain the differences let me state that I believe laws don’t make good people bad or bad people good. But as a consumer of investment advice, you need to know what the law requires. So, here we go…

Registered Investment Advisers (RIAs). RIAs, which are companies, are required by law to meet a fiduciary standard. Employees of RIAs, known as Investment Adviser Representatives are also required to meet a fiduciary standard. A fiduciary standard requires the company and adviser to always act in the client’s best interest. Any conflict of interest must be disclosed. RIAs are governed by the Investment Advisers Act of 1940.

Broker/Dealers (B/D). Broker Dealers are also companies and they are required to meet a standard of suitability.  Registered Representatives work for B/Ds and they are held to the same standard of suitability. A standard of suitability requires that recommendations are consistent with the client’s risk tolerance. The B/D can put his interests ahead of yours. B/Ds are specifically exempted from the requirements of the Investment Advisers Act.

Insurance Agents. Insurance Agents are regulated by the states for advice related to insurance. If they give advice in relation to investments they must be either Investment Adviser Representatives or Registered Representatives and are regulated based on how they are licensed.

It is important to know what standard the Financial Advisor is held to. But it is not always clear.

Some companies are both RIAs and B/Ds. They give advice as RIAs and execute transactions as B/Ds. It is very important to know which “hat” they are wearing when you are dealing with them.

To clear up the mud, here are some questions you might want to ask a potential Financial Advisor or your current Financial Advisor:

  1. Are you a Registered Investment Adviser? If so, do you ever act as a Broker Dealer?
  2. Are you regulated under the Investment Adviser Act of 1940?
  3. Are you held to a fiduciary standard by law?
  4. Do you disclose all conflicts of interest?


Curt Sheldon, EA is a Fee-Only Financial Planner and Enrolled Agent based in Northern Virginia.  He can be contacted at (703)542-4000, (800)928-1820 or Curt@CLSheldon.com

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication

The information contained in this blog is for general financial education and should not be construed as individual financial advice.  Please consult your own financial, tax or legal advisor prior to applying any principles discussed here to your own financial situation.