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Goldman Sachs SEC Case Divides Wealth Managers

Charles Paikert, Family Wealth Report, Editor, New York, May 5, 2010

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How the Securities and Exchange Commision's case against Goldman Sachs will impact the wealth management business is far from clear, but many wealth managers believe advice-driven business models will benefit as a result.

Wealth managers are divided about the ultimate impact of the Securities and Exchange Commission’s fraud charges against Goldman Sachs on the business.

Some believe the allegations that Goldman misled investors will cast a cloud over wealth managers; others believe the repercussions will be minimal.

And many are convinced the still unfolding story will aid their own business in competition with the Wall Street giant.

“Goldman is the company we compete with most often,” said Steve Lockshin, chief executive of Convergent Wealth Advisors. “The question has always been is Goldman Sachs in the product business or the advice business?  I think the [mortgage securities deal] in the SEC case puts them squarely in the product business.”

David Hou, a founding partner of Luminous Capital in Los Angeles, and a former Goldman employee, said his firm also squares off against Goldman for high-end clients.

“I think clients have learned that Goldman is not a wealth management platform that is objective,” Hou said. “I would say that wealth management is not the right terminology for that platform.”

To be sure, Goldman Sachs has vigorously denied any wrongdoing and denied claims it was not acting in its clients’ best interests.

Lloyd Blankfein, the firm’s chief executive, is expected to present a spirited defense of Goldman’s business practices today when he testifies before a US Senate panel, and the firm has launched a strong legal and public relations counter-offensive.

Goldman declined to comment specifically about wealth management for this story, but a spokesperson pointed to public statements on the firm’s website defending its position against the SEC charges.

Competitors draw contrasts

Not surprisingly, however, many of Goldman’s competitors are making the case that the Abacus imbroglio serves them well by contrasting Goldman’s business model with their own.

 “Not all wealth managers are the same,” said Maria Elena “Mel” Lagomasino, chief executive of GenSpring Family Offices. “My view is it's apples and oranges.”

Lagomasino went on to contrast the differences between the fiduciary standard binding GenSpring and other RIAs, and the suitability standard binding Goldman and other broker-dealers.

“In the fiduciary standard by law the advisor serves one master, the client, and is required to do so with undivided loyalty,” she said. “In the other business model, the ‘advisor’ has no such requirement and is a salesperson for his firm. These are not words. They are legal distinctions. The shame is that the marketing machines have clients so confused that they can't tell the difference. If clients knew the difference, I believe they would choose wealth management firms that are RIAs and subject to the fiduciary standard.”

While praising Goldman’s capabilities as an investment bank, Tony Guernsey, New York-based head of national wealth management for Wilmington Trust, said the Wall Street firm is “much more a sales and trading operation” and not an industry leader in wealth management.

“Their clients tend to be high-end, self-directed investors who are not looking for wealth management services,” Guernsey said. “Goldman provides excellent retail brokerage service for those clients, but it is not a holistic approach.”

Not much of a dent

But despite all the sound and fury of the current media storm, the case may not even put much of a dent in the firm’s position as a formidable wealth management competitor, say industry observers.

“Initially there is massive brand damage,” said industry consultant Tim Welsh, president of Nexus Strategy, of Larkspur, California. “But what people talk about and what they do can be entirely different. Look at what happened to Toyota [with its cars’ braking problems], and their sales are up. Merrill Lynch should have been crushed by bad publicity two years ago and they may made more money than ever last year. Goldman is so entrenched that I think in wealth management it will be business as usual.”

“I don’t think this will have much impact on their wealth management business,” said industry veteran Jamie McLaughlin. “Clients that want their products will continue to use them.”

Prospective clients “might be less likely to hire Goldman because of all the negative publicity,” said Jeff Spears, chief executive of Sanctuary Wealth Services LLC in San Francisco. But, Spears added, Goldman may be aided by an equally strong tendency by the public to “forgive and forget”.

Indeed, at this point, the ultimate impact of the SEC’s offensive against Goldman – and possibly other firms  – on the wealth management industry remains uncertain.

“I think it’s too early to tell,” said Hou. “It’s usually not one thing but a cumulative effect that weighs on clients’ minds.”

“I don’t think there’s any way anyone can intellectually honestly say the Goldman situation is not going to have a negative impact. The question is what’s the magnitude? This is another example of a Wall Street conflict of interest causing a systemic crisis of confidence,” said Elliot Weissbluth, chief executive for Chicago-based HighTower Advisors.

If the perception is widespread, Weissbluth believes, firms such as his will benefit.

“The silver lining is that it will lead to greater awareness of the simple fact that firms like HighTower are better and safer,” he said.

Doug Regan, president of Northern Trust’s wealth management group, neatly summed up the industry’s ambivalence about the Goldman affair.

“It comes at a bad time for the industry, as banks are beginning to put the troubles of the past two years behind them. It gives clients one more reason to question their provider,” Regan said.

But there was another side to the story, he stressed.

“This puts a premium on firms that stayed close to their clients and lived their core values,” he said.

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