Of all the colourful quotes in Greg Smith’s remarkable “Take this firm and shove it” letter, the one that reverberated the most was the fact that senior Goldman bankers routinely refer to their clients as “muppets.”And the umbrage is understandable.
No one paying Goldman for advice likes to think that Goldman’s bankers are running around ridiculing them.
But the sad truth is that many of Goldman’s clients ARE muppets.
And so are many of the clients of other huge and massively profitable Wall Street investment banks, money-management firms, hedge funds, and other financial services firms–which is to say, a significant percentage of the consumers of financial-services products.
Why are they “muppets”?
Well, the definition of “muppet,” say those who live on the other side of the pond (where “muppet” is apparently a common term on trading floors to describe the guy on the other side of the trade) is “idiot.”
And you don’t have to look too deeply into the reality of the financial services business to realise that many of the folks who buy products and services from these businesses are idiots.
Let’s focus on a simple example that most individuals are familiar with: An “actively managed” mutual fund.
“Actively managed” mutual funds are funds managed by a fund manager who tries to select securities (e.g., stocks or bonds) that will outperform the market as a whole.
“Actively managed” mutual funds cost much more than “passively managed” funds (like index funds) that are designed to track the performance of a market index rather than beat it.
For the past half-century, dozens and dozens of academics, money-managers, independent financial advisors, and journalists have explained in dozens and dozens of different ways why buying expensive actively managed mutual funds instead of index funds is, in a word, stupid.
- The vast majority of actively managed funds underperform good passive funds
- There is no reliable way to identify in advance the handful of actively managed funds that will outperform passive funds (everyone can do it in hindsight, but you can’t invest in hindsight)
- Most of the outperformance of the handful of outperforming active funds is attributable to luck, not skill
- Past performance does not predict future results
That low-cost tax-efficient passive funds outperform expensive active funds is not a theory: It is a fact. And it is a fact that even a complete novice investor can learn by reading a couple of good articles on the topic or buying a single book by John Bogle.
TRILLIONS OF DOLLARS are still invested in actively managed mutual funds.
And BILLIONS OF DOLLARS are still paid to active mutual fund managers and financial advisors in fees.
And some of these financial advisors and fund managers work at Goldman Sachs.
Any Goldman Sachs client who pays Goldman big fees to be invested in an actively managed mutual fund or a hedge fund is, therefore, in all likelihood, a muppet.
And the same can be said for the clients who buy dozens of other more-complicated products that Goldman Sachs sells, including some corporate advisory services, derivative products, trading services, restructuring services, and so forth. Many of these products either don’t add the value the clients think they do, or cost way too much relative to the value they add.
So it should not come as a huge surprise that Goldman’s bankers see clients who buy these products for what they are:
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