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Goldman Sachs thinks my clients are Muppets

(MoneyWatch) COMMENTARY Every now and then I get a phone call from Goldman Sachs.  I usually have my receptionist place the caller in voicemail, but with all of the Muppet hoopla regarding Greg Smith's resignation and the New York Times op-ed, I decided to return the call.  

The very pleasant woman I spoke with let me know that Goldman Sachs was there to help me with my clients.  She touted the Goldman Sachs lineup of mutual funds that could fit the bill for my clients.  I confirmed that she was referring to the $63.5 billion of Goldman Sachs mutual funds Morningstar ranks a bit below average overall in both stocks and bonds.  Morningstar gives an average mutual fund three stars and Goldman Sachs rates between 2.3 and 3.1 in each of the four categories. Given that even average performing funds underperform the index funds I recommend, I asked the rep why I would do this to my clients? 

It was a very short call, especially after I noted this might make a good story for CBS MoneyWatch. She assured me someone from the Goldman Sachs media relations group would call me back, but my phone never rang. I followed up and spoke to Andrea Raphael, Goldman Sachs Vice President of Media Relations, who noted "67% of client assets scored three stars and or higher."  That may seem impressive until you know that Morningstar's star rating system gives three stars or higher to 67.5 percent of the thousands of funds it rates from dozens of fund families.

Russel Kinnel, Morningstar director of mutual fund research, confirmed that the Morningstar overall fund family ratings were also asset weighted. He noted it would be reasonable to expect  larger funds to have higher ratings (one reason they are larger is that investors are more likely to invest in funds with good Morningstar ratings). That would, of course, mean that well over 67.5 percent of assets of all funds should be rated three stars or higher.  Thus, Goldman Sachs having only 67 percent is consistent with the below-average asset weighted ratings Morningstar gives the Goldman Sachs family.

My clients respond

I asked a couple of clients what they would think if I recommended, for example,  the Goldman Sachs International Equity and Dividend Premium fund (GIDCX). I would, of course note the fund's 2.05 percent annual expense ratio and its Morningstar two-star rating, not all that dissimilar to the overall international average expense ratio of 1.61 percent annually and the 2.4 average star rating.

I'm happy to say my clients found that proposal amusing and not a single one thought I was serious. My clients were familiar with my story critiquing the Goldman Sachs top 5 reason to choose active over passive.  Expenses matter, and they know it, so I'm fairly confident that nearly every client would have fired me had I pushed any average-fee and below-average performance fund family.

A simple Google search by the Goldman Sachs rep with my name and her firm would have turned up more material on my views of Goldman Sachs, far earlier than the Greg Smith piece.

Goldman Sachs - most useless forecast
Goldman Sachs wins, investors lose
Goldman Sachs Top 5 reasons to choose active

The moral of the story

Clearly Goldman Sachs isn't the only underperforming mutual fund family to solicit my business for my clients.  And most of Goldman Sachs business comes from institutions and the very wealthy, probably not investing in retail mutual funds. 

But just because someone is selling doesn't mean you -- or your advisor -- should be buying. And that advice goes well beyond this Goldman Sachs example. Minimize expenses and emotions and maximize diversification and discipline.  Doing so prevents you from becoming anybody's Muppet.