THE BLOG
03/30/2012 01:15 pm ET | Updated Jun 17, 2014

Why Muppets Everywhere Should Worry

Goldman Sachs referring to clients as muppets? Like Captain Renault in Casablanca, I'm once again shocked.

Goldman's alleged disdain for their clients points to a far greater problem at the core of the financial regulatory landscape, one that should strike fear into the hearts of would-be-muppets everywhere.

Many people -- even those in financial services -- don't realize that there are two vastly separate regulatory regimes out there that watch the people who watch over other people's money. On the one hand are "registered investment advisers" who are registered with the SEC and are held to a higher fiduciary standard, meaning they can only put their clients into investments that are in their clients' best interest.

Amazingly, a whole other regulatory regime exists: one of "registered representatives" who are regulated by FINRA. These registered reps are what most people call stockbrokers (brokers). Brokers do not have to put their clients' interests first. Usually, they call themselves "financial advisers" in a seemingly transparent bid to piggyback on the term "investment adviser." But "financial adviser" is not a legal term with any designated meaning. Stockbrokers are held to the much lower "suitability standard" -- which basically means you can't put a great-grandmother into 100% internet stocks. Since it doesn't require putting the client first, you might have a guess at who frequently gets first dibs instead.

Yes, stockbrokers are often glorified car salesmen. They sell a product, usually an annuity or sometimes a mutual fund, and not always the best one, but sometimes the one with the highest commissions and fees attached -- something which benefits them at the miserable expense of the client.

Of course, there are honest, well-meaning brokers out there. But if they were really serious about putting the client first, why wouldn't they drop their stockbroker sheep's clothing and become registered investment advisers? The good ones have already done so. I'm proud to say I've been a registered investment adviser since I started managing money many years ago: first registered with New York state, and since 2011 registered with the SEC.

Goldman Sachs is such a large firm that it probably has both brokerage divisions and investment adviser divisions, which ironically would have different standards of care to their clients. But to call your customer a muppet speaks of a culture that couldn't possibly think of clients with any dignity. If that wasn't the brokerage division, I'd be surprised. The big firms are usually brokers, not investment advisers. And the culture is an unsurprising result.

Clients should protect themselves by always asking their adviser straight-up: are you a registered investment adviser? Only those three exact words will tell the tale. And they should get it in writing -- to prove they aren't a muppet.