Why Conflicts of Interest for Transactors Always Occur in Practice

A recent survey of first year analysts at Goldman Sachs[1] revealed in the second week of February 2021, the average analyst worked 105 hours and the average hours worked each week by analysts in 2021 was 98 hours.  Mental and Physical Health scores deteriorated from levels of 9 (10 being the healthiest) to scores of between 2 and 3.  Some telling comments were “I didn’t come into this job expecting 9am-5pm’s, but I also didn’t expect consistent 9am-5am’s either” and “What is not OK to me is 110-120 hours over the course of a week! The math is simple, that leaves 4 hours a day for eating, sleeping, showering, bathroom and general transition time.”

Three obvious questions arise: What are these analysts doing? Why would management permit (or encourage) this to happen? Why would the employees continue to stay under such conditions? Amicus’ opinions as to the answers based on familiarity with the financial services industry are below.

The analysts are either working on “deals” that need to be done in short-time frames, or they are working on “pitches” for new “deals” Goldman Sachs is desperate to secure.  These often require quick responses, many of them overnight as analysts are regularly required to work through the night and also be there in the day to present their work and be briefed on new work.

“Management” almost certainly went through this process themselves when they started as this is not a new phenomenon at Goldman Sachs or within the investment banking industry in general.  Those analysts who “weren’t up to” the work regime left and those remaining were promoted to “management” within Goldman Sachs where they now set the firm’s policies.  This firm is working as actively encouraged to separate those with the necessary stamina and motivation for a career in investment banking from those who are “not up to it”.

Similar to the second answer, analysts who stay are willing to sacrifice almost all other aspects of their lives for the high salaries they are paid and the opportunity of even more riches if they can endure the rigours of being an analyst and progress in the organisation such that they themselves can become “management” as part of a culture that perpetuates itself.

The wider implications of this regime are sinister for client outcomes if you have an organisation whose self-selecting employees are almost totally driven by their personal rewards of prestige and money to the exclusion of nearly all other considerations from their lives.  This internal culture is supported by a bonus culture where the majority of financial remuneration (or “compensation” as it is known in the industry) is variable depending on “performance”. Performance being defined by the organisation as the monies made through transactions with “under-performers” either being fired as they cannot cover their own costs or leaving because their bonuses and not sufficiently large to “compensate” them for the sacrifices necessary to stay.  The issue is Goldman Sachs is structured to work in the financial interests of Goldman Sachs and Goldman Sachs’ employees and these may not always be aligned to the interests of Goldman Sachs’ clients so if conflicts of interest arise the incentives are strongly for them to be managed by Goldman Sachs in its own interests rather than those of the client.

While the Goldman Sachs situation is extreme, this highlights the general conflicts of interests between what is best for a transacting counterparty and what is best for the client in a model where a financial services provider only gets paid if a transaction is completed and as a result expects its employees to be highly focussed on “revenue”.  At more moderate levels, the firm conclusion drawn by Commissioner Hayne in his enquiry into the Australian banks and earlier by Michael Cole in his report to the NSW government was the motivation of the transactor will always be to do transactions whether these are in the interests of the client or not.  These conflicts of interest are so strong in practice they cannot be effectively managed as the bottom line is the employee works for the financial services provider and will be expected to work in their employer’s interest and not the client’s whenever these differ.

The client therefore needs to recognise advice given by a transacting counterparty will always be tainted and can never be considered independent.  If a client wants unbiased advice on a potential investment, it should always seek this from someone with no pecuniary interest in whether the transaction occurs or not.


[1] Working Conditions Survey, Goldman Sachs & Co LLC, Investment Banking Division February 2021

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