The Goldman Sachs Impact On Private Wealth Management

By HighView Financial on April 29, 2010

I believe that the impact of the current Goldman Sachs alleged fraud investigation that is playing-out in the media will be a catalyst for long-standing implications for private wealth management in North America.

Here’s how I get there…..

1. Investor Psychology: Although North American equity markets have staged an impressive recovery over the past year, the negative psychological impact on private wealth investors from such a severe global capital markets contraction remains strong.

2. Derivatives: Complex financial derivatives, especially the US sub-prime mortgage backed securities, were at the centre of the near global capital markets collapse in 2008.

3. Investment Banks: Global brokerage firms and investment banks were linked with the creation and distribution of these financial instruments which lacked transparency as to the nature of the underlying investment structures and fees. Although dwarfed in size relative to the US and European experience, Canada did not escape unscathed — the ABC Paper situation remains fresh in the minds of many private wealth investors!

4. Frauds: Added to these global derivatives issues are a series of very public and tragic financial advisor frauds in North America such as Bernie Madoff and Earl Jones. The Portus disaster also remains centre-stage with many private wealth investors!

5. Blame: All of this leads the main stream media and the average Canadian retail investor to point-the-finger for the current capital markets situation and the global economic recession at the investment brokerage/management industry.

6. Trust: As a result, many retail investors have lost loyalty, trust and confidence in the investment and wealth management industry.  Trust is supposed to be the foundation upon which the investment and wealth management industry are built.

7. Investment Professionals: The US Senate testimonies by Goldman Sachs executives and the professionally offensive, self-serving emails by the Fabulous Fab, unfortunately just reinforce the belief (not reality) in the mind of the average retail investor that the whole wealth/investment industry is trying to screw them out of their hard-earned life savings.

So where do we go from here…………

1. Simplicity & Transparency: The average private wealth investor, who is simply trying to save for retirement and other family goals such as retirement properties and children’s university education, will continue to seek greater simplicity and transparency in their investment solutions.  In other words, “It’s my money. I want to understand what I’m investing in and how much I’m paying!”

2. Conflict Avoidance: Investors will become increasingly sensitive to Advisors who sell their own “investment management products”.  “Is their product the best product for me, or my Advisor?”

3. More Self-Management: Self-Directed investing channels such as Qtrade and TD Waterhouse will continue to grow as many investors “opt-out” from using an Advisor in favour of doing their own investing especially as many of these organizations become more self-directed wealth management platforms instead of simply self-directed trading platforms.  An investor saying we’ve heard in recent years in the media, “I can lose 20% of my portfolio just as easily as my Advisor…I might as well run my own money!”

4. Shift From Products To Portfolios: Advisors will need to continue to evolve their wealth management practices from purveyors of investment products that are solely return oriented to that of portfolio consultants, whose sole function is to design investment portfolios for their clients that recognize both return and risk. In other words, “I want a prudently designed investment portfolio not a collection of investment ideas!”

5. Goals-Based Investing: Advisors and Investors will gradually start to become more purpose driven in the construction of portfolios.  In other words, helping clients meet their investment goals – ie: retirement needs – instead of playing what Charles Ellis, in his book, “Investment Policy”, calls the Losers Game of trying to perpetually beat the market indices! “If my portfolio is meeting my retirement goals, who the heck cares if I’m beating the TSX…it’s a completely irrelevant benchmark!”

6. Fiduciaries Will Return: The notion of what it means to be an investment fiduciary — an investment professional who acts in the sole interest of their clients – will continue to gain traction in the wealth management industry and the media. The concept of wealth stewardship will become much more prevalent.  Investors are increasingly saying, “I want someone who I can trust and who puts my interests ahead of their own!”

7. Who Holds My Money?: Clients will increasingly want to know,  “Who holds onto my investments and who has access to my account?“. The concept of separating the investment management function from the custody function – as came out of the 1930 financial reforms in the United States – will become increasingly important for clients. This division of professional duties (ie: investment management, custody, brokerage, etc.) has been completely forgotten by a whole generation as large financial institutions have integrated their various service offerings under one roof!

All of these changes will not happen overnight but with the events of the past few years in the global capital markets and the psychological imprint that has been left on investors, the future of private wealth investing will look a lot different ten years from now! I strongly believe that the global wealth/investment management industry needs to return to the basics of what this industry is supposed to be about: Fiduciary-based, investment professionals who put their clients’ interests ahead of their own and design tailored portfolios for clients that are prudent, objective & transparent, with the sole purpose of helping these clients satisfy their various financial goals!