The civil suit filed against
The case against Goldman adds a “new dimension” to the debate over whether legislators should establish a fiduciary standard for everyone dispensing financial advice, Knut Rostad, chairman of the
“It is concrete and specific as to what it is, as opposed to the pitchfork-storming-Wall Street view of this,” he said.
Fiduciary vs. Suitability Confusion
Rostad said the case could provide a clear contrast between the fiduciary standard and the suitability standard — something that has been confusing the industry thus far. He said that based on Goldman’s declaration to defend its principles and practices and fight the charges, we have an unvarnished view of what the world’s leading investment banking firm believes, in part, is required of the suitability or fair dealing standard.
Going forward, if Goldman wins outright, these practices will be affirmed in law.
The SEC sued Goldman Sachs on April 16, alleging the investment bank made “materially misleading statements and omissions” about a structured product sold to investors. The SEC says Goldman did not tell investors that hedge fund Paulson & Co. had input in the selection of residential mortgages that were part of the structured product. Paulson later made a $1 billion profit from this product by betting that the housing market would fall.
For its part, Goldman maintains it isn’t a fiduciary. In testimony before the
But James Cox,
“Why not have a fiduciary standard where you have to have cards turned up on the table when selling a product?” Cox asked.
Burden on Investors to Find RIAs
If the court of public opinion factors into the case, Goldman appears to be losing some ground. A survey released by
Tamar Frankel, a professor of law and
“There comes a point when the investors have to make a decision and exercise some pressure,” he said. This means moving the focus away from the product and over to the salesperson.
Investors, Frankel said, need to ask whether their broker is a registered investment advisor. If they aren’t, it’s up to the investor to find someone who is.
But Terry Savage, an author and personal finance columnist, doesn’t believe empowering investors to ask the right questions is enough. She said that she doesn’t understand why there isn’t more demand on Congress to write a law that at the very least creates a fiduciary standard.
“It shouldn’t be such a tough thing to pass,” Savage said. “If you are trying to sell a product, you should disclose what’s in the product and your interests in that product.”
Savage added that “there’s never going to be a law to legislate against stupidity, greed and emotion.” She said the point of legislation is not to wipe out all mistakes; that would be impossible since markets by nature go to extremes and people will lose money. Instead, the point is to legislate the right to equal access over vital information so that investors can make their own decisions, good or bad. Savage said that she believes there is an even greater responsibility to have a fiduciary standard because so many Americans have been exposed to the markets through the financial services world telling them they need to invest for their retirement futures.
“But people are saying the game is rigged and Wall Street is dealing us from the bottom of the deck and giving their friends the best cards,” she said.