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Asia's Expats: Are We All Muppets?

"My muppet client didn't put me in comp on the trade we just printed. We made an extra $1.5 million off of him."

This is an excerpt from long-term Wall Street trader Greg Smith's book, Why I Left Goldman Sachs, an indictment of a corporate culture gone awry. The book's release had Goldman on tenterhooks over the fear that Smith would air the investment bank's dirty laundry.

Translated, the quote means that the client trusted his broker to provide a fair price for a trade rather than checking the price with other brokers, and got ripped off for that trust.

Smith outlines the devolution of a corporate culture, and indeed an entire industry, from one that historically played the role of trusted advisor looking out for the best interests of its clients, to "…the idea of a client as someone much less smart then you, someone you could try to take advantage of." According to Smith, "Being a muppet meant being an idiot, a fool manipulated by someone else."

We're All Kermit In the Offshore Markets

The descent from client-centered, advisory-based relationships that put client interests first to a sales-oriented, product-driven, predatory culture where clients are treated like muppets did not just occur on Wall Street. The same predatory culture is rife throughout the offshore markets and institutions that service Asia's expat population, from private banks, wealth management departments of commercial banks, property brokers, and offshore "independent financial advisors" (IFAs).

Smith's clients were all large institutional players-governments, municipalities, hedge funds and pension funds-that were presumably able to look out for themselves. If they couldn't fend for themselves, what chance do Asia's expats have?

"Monstrosities"

At some point, Wall Street realized that it could make more money by creating and selling sophisticated products that preyed on client greed and fear rather than by relying on the slow and steady business of fiduciary-based advice. Quants or "rocket scientists" (literally-these people left places like MIT to work on Wall Street rather than at NASA) armed with esoteric computer algorithms created fee-laden, complicated products with complex payoff structures that few people understood-certainly not the clients, and often not the people selling them (although that doesn't seem to have dented their arrogance).

Fabrice Tourre is a Goldman trader, who, along with Goldman, was under indictment for fraud in 2010 for misselling a particular type of structured product. In early 2007, he wrote in an email to his girlfriend that, "The whole building is about to collapse anytime now … Only potential survivor, the fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all the implications of those monstruosities [sic]!!!"

According to Smith, this was a pretty good description of the complex structured-product market that neither clients nor those selling the products completely understood. He writes:

"They are called exotics for good reason: These products are so complicated that often the clients don't understand how much money they've paid to the bank. Exotics require very complicated financial models to value them accurately, and often the smartest quants within the bank are assigned to create and price them."

Not even the big players stood a chance.

"One trader did an elephant trade with the government of Libya, which gave Goldman $1.3 billion to invest in a product that bundled a bet on currencies with call options on big liquid stocks such as Citigroup, UniCredit, Santander, and Allianz. Placed just before the financial crisis, this bet was one Libya would come to regret. Its $1.3 billion was vaporized in short order-gone."

"[N]o matter who the firm was dealing with, Goldman and Wall Street were getting really smart at playing on clients' fear and greed."

Essentially, Goldman was able to leverage its brand and historic trust to dupe clients who believed their advisors/firms were acting in their best interests. Many players in the offshore markets and in Asia do the same, trading on their cachet and sophisticated marketing campaigns that imply fiduciary relationships only to profit at their client's expense.

The Client Who Doesn't Know How to Ask Questions

Smith describes four types of clients he typically encountered while working at Goldman: the Wise Client, the Wicked Client, the Simple Client, and the Client Who Doesn't Know How to Ask Questions.

The "Wise Clients" were the large hedge funds and institutions that had all the infrastructure, talent, and savvy of Wall Street (since most came from Wall Street) and could look after themselves.

The "Wicked Clients" were the same as Wise Clients, but pushed ethical and regulatory boundaries and often stepped over the line.

The "Simple Clients" were large asset managers and pension funds that didn't have the sophisticated architecture, talent, and savvy of Wall Street and were often taken advantage of because of it.

As for the "Client Who Doesn't Know How to Ask Questions," Smith states, "This is the sorriest of the lot, because not only are these clients simple, but they are also trusting." He adds, "They often are the investment managers, who are meant to look after the pensions of cops, firemen, and teachers, or they might be running the portfolio of a charity, an endowment, or a foundation."

Smith is speaking of institutions, but nearly all expat retail clients would fall into this category. Lacking the financial sophistication of the private banks and too trusting, they are easily played for the patsy.

"The firm believes, deep down, that one outcome is going to transpire, yet it advises the client to do the opposite, so the firm can then take the other side of the trade and implement its own proprietary bet."

"What struck me when I attended our daily morning meetings in London is how often our view of the world changed. The oscillations in opinion were far too frequent to make any real sense. The day's world view was usually based on what the traders had on their books, and what they were looking to get rid of (sell) or load up on (buy)."

It's easy to take advantage of clients that are blinded by a brand or blithe marketing.

"A certain Goldman cachet came into effect with the Client Who Doesn't Know How to Ask Questions. He was dealing with the smartest guys on the Street, he figured, so why did he need to do the math for himself?"

Smith points out that what these clients failed to grasp was that the fiduciary culture that had existed previously was eroding fast.

"[I]t was a trading culture where people were, first and foremost, concerned about making money for the firm."

"They're focused on getting clients do things, not asking clients what they need."

Don't Bet Against the House

Smith asks, "But how does Wall Street make so much money, anyway. Surely, there are times when they must lose?"

His answer, "Don't count on it." He goes on to explain that, "There are quarters when a Wall Street bank makes money every day of the quarter … How is this even possible?"

"Two words: asymmetric information. The playing field is not even. The bank can see what every client in the marketplace is doing and therefore knows more than everyone else."

It's like a blackjack dealer who can see every card in each player's hand along with every card in the deck. It's hard not to win.

Don't Be a Muppet

Unfortunately, the same predatory, sales-driven culture permeates Asia's financial services industry, despite millions of dollars of marketing selling the illusion of trust. If Goldman's large institutional clients couldn't look out for themselves and understand the products they were buying, what chance does the ordinary, working expat retail client have against sophisticated private banking, wealth management, and IFA teams foisting "monstrosities" on trusting clients? Your best bet is to avoid becoming the "Client Who Doesn't Know How to Ask Questions." Start making sure you're working with an advisor who is a fiduciary and not a broker, and always understand what you are investing in. It's your future.

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About Creveling & Creveling Private Wealth Advisory

Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future. For more information visit crevelingandcreveling.com.

Copyright © 2012 Creveling & Creveling Private Wealth Advisory, All rights reserved. The articles and writings are not recommendations or solicitations, and guest articles express the opinion of the author; which may or may not reflect the views of Creveling and Creveling.