Losing a key intangible: trust

This morning, the New York Times printed an unusual op-ed. In the piece entitled “Why I Am Leaving Goldman Sachs,” Greg Smith, the now former head of Goldman’s United States equity derivatives business in Europe, the Middle East and Africa, made a very public break with the company. Smith, who is based in London, blasted the company for losing touch with its original culture:

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.
It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

That issue of trust is at the heart of the adviser-client relationship. Finance today is a complex and not-well-understood activity. Thus the two key intangible assets are the adviser’s skill and knowledge and the trust that the adviser is watching out for the client’s interest. As the New York Times noted:

Mr. Smith is saying publicly what others whisper privately, which is why his cri de coeur may be so provocative. Even on Wall Street — where making money is good, and making more money is better — a few shibboleths still command respect, including the one that the customer should come first, or at least second, not dead last. Since the financial crisis, in fact, nearly all the big banks have claimed to be client-centric as they seek to rebuild public trust.

But Smith states that basis for this trust is gone:

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
. . .
These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

Whether Smith’s denouncement makes any difference remains to be seen. Coming from an insider, it may shake up “The Street.” On the other hand, the larger culture in the industry is that “Greed is Good” so his statements may be shrugged off as just the way the game is played. Two outcomes to watch, however: 1) Will this reinforces the calls for outside regulation and restraint? 2) Is Goldman’s reputation damaged enough to cause serious economic pain as clients take their business elsewhere? Goldman may have lost an intangible assets in the form of the public perception of trustworthiness. But the real test will be how clients react. The intangible of trust is not something you necessarily control — it is part of the customer relationship. In the final analysis only the client’s reactions can destroy that trust asset. So watch how Goldman’s clients react – and what price the company pays as a result.

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