The words “due diligence” and “suitability” have taken on a whole new meaning following Greg Smith’s very public condemnation of his former employer, Goldman Sachs. Smith, an executive at Goldman, lambasted his firm via an Op-ed in the New York Times last week. Among other things, Smith called the environment at Goldman “toxic” and that the interests of clients are now “sidelined in the way the firm operates and thinks about making money.”
Smith’s characterization of Goldman may hit a nerve with investors and brokers alike. For investors, the diatribe against Goldman could very well spur them to rethink the quality of investment service and advice they’re receiving. Meanwhile, brokers may be prompted to re-examine and reaffirm the due diligence duties they owe to clients.
No investment is without risk. But financial professionals and their brokerage firms are bound by certain duties to clients – and that includes making investment recommendations based on a client’s suitability, as well fully and accurately explaining an investment.
In the past year, countless examples have come to light in which these duties have fallen by the wayside. Medical Capital Holdings, Provident Royalties, MAT/ASTA, Lehman Brothers principal-protected notes, Behringer Harvard REIT. While each of these cases and the financial products they represent may be different, a common theme ultimately prevails: In one way or another, investors found themselves on the losing end of their investment because the concept of “client-first” was all but forgotten by the brokers and firms they trusted.