Exclusive Interview: Andrew Golden Reveals the Huge Fiduciary Conflict-of-Interest Nobody Talks About
We’re deep into the heart of Fiduciary September, and what better way to celebrate than to interview one of the members of the Tamar Frankel Fiduciary Prize Selection Committee, Andrew Golden. Each year, the Institute for the Fiduciary Standard presents the award to a person who has made significant contributions to the preservation and advancement of fiduciary principles in public life. The prize is named for Professor Tamar Frankel of Boston University School of Law. This year’s recipient is David Swensen, Chief Investment Officer at Yale University. Like Swenson, Andy oversees the endowment at his university, Princeton. He has served as the President of the Princeton University Investment Company (“PRINCO”) since 1995. PRINCO is among the highest performing endowments in the country.
In 2006, Mr. Golden and PRINCO received Institutional Investor magazine’s Endowment of the Year Award for Excellence in Investment Management. Mr. Golden joined PRINCO from Duke Management Company where he was an Investment Director. Prior to that, he served as a Senior Associate in the Investments Office at Yale University. Mr. Golden holds a B.A. from Duke University and an M.P.P.M. from the Yale School of Organization and Management. He has earned the Chartered Financial Analyst designation and is a member of the New York Society of Security Analysts. Mr. Golden was a member of the Board of Directors of the NAB Asset Corporation, a publicly-traded commercial loan workout specialist. He currently serves on fund advisory boards for several private equity and venture capital managers, including Bain Capital, General Catalyst Partners, and Greylock Partners. Mr. Golden was a founding member of the Investors’ Committee of the President’s Working Group on Financial Markets. In addition to his work at PRINCO, Mr. Golden serves as a Trustee of the Princeton Area Community Foundation and Rutgers Preparatory School, and is on the Board of a private family office. He is married to Carol Litowitz Golden, resides in Princeton and has two college-age sons, who despite their genetic heritage are quite athletic.
FN: In many ways, Andy, you’re career has allowed you to remain most objective when it comes to commenting on the financial services industry. How did you end up where you are today and what past experiences influenced you the most?
Golden: I’ve had a circuitous career path. First I was a professional photographer This got me involved in the management of organizations, which, naturally, got me interested in learning about managing organizations. So I applied to the Yale School of Organization and Management. (Editor’s Note: It’s now called the “Yale School of Management,” but continues to go by the acronym “SOM.”) After being accepted, I decided to take some time and work for a small investment firm. Once I was at SOM, I applied for an internship at the Yale Endowment Office. I really enjoyed that job and ended up working there following earning my degree at SOM. Besides working at Yale, my circuitous path turned out to have the greatest influence in my career. Because of it, I was able to have a higher level of objectivity to ask at each job I looked at “What made sense and what didn’t?”
FN: In July 2015 we interviewed Roger Ibbotson who mentioned the shift in the financial industry from security selection to product sales. How do you see the movement to the latter impacting the relationship between the service provider and the client? How has the shift made things easier for the client? In what ways has the shift made things more difficult and confusing to the client?
Golden: The differences are most obvious in terms of individual investors as opposed to big institutions. In many ways, it makes sense for individual investors. While institutions can afford paid staff, Individuals often find themselves challenged in terms of resources regarding individual security selection. Investment products alleviate this to an extent by allowing individual investors to delegate the security selection function to trained professionals. In this sense, products offer more to the individual. The challenge, beyond chasing performance, is optimizing the fees paid to those professionals.
FN: The preponderance of product sales has provided an avenue for “hidden” fees and has exasperated the need to better define the duties of a fiduciary adviser. Why is this important to the retail investor? Why is this important to the institutional investor?
Golden: Fees, like many other areas, are the first thing that gets disclosure. From an ERISA standpoint, anything that’s “hidden” is a violation of a fiduciary duty. (Editor’s Note: Vendors must report all fees under the DOL’s Fee Disclosure Act of 2012.) The focus on fees has augmented the need for the fees to be more transparent. From the client’s perspective, there is a greater need to identify the fees. When buying securities, the fee (i.e., the commission) was very obvious. Regarding products, there are increasing layers of fees and the arrangements are more complicated. This presents a substantial burden on retail investors, who often lack the sophistication and training to quickly – and correctly – analyze the significance of each layer of fees. It’s less of a problem for a certain class of institutional investors. Larger institutional investors can afford to hire a dedicated staff to conduct proper due diligence on investment products. Plan sponsors for smaller companies, on the other hand, do not have the same personnel resources. As such, it’s not surprising to see they have the same challenges as individual investors.
FN: Item Three of the Institute for the Fiduciary Standard’s Best Practices of Fiduciaries list is “Avoid Conflicts-of-Interest.” What are examples of the most common conflicts-of-interest and how do you see the best way is to avoid them?
Golden: Everyone talks about 12b-1 fees, commission, and revenue sharing. Let me offer you something many people overlook. This very common conflict-of-interest poses a huge problem, yet we rarely see it talked about. This is the conflict-of-interest represented by asset growth within the product. The growth of assets makes it harder for portfolio managers to produce the same results they did when their portfolios had lesser assets. It’s like the old adage “Good things come in small packages.” It’s easier to find little things that are a bargain than it is to find bigger things that are a bargain. In many cases, the fees portfolio managers make are based on their total assets, so there’s a financial disincentive to cap the growth of the portfolio within an investment product. How does one avoid this particular conflict-of-interest? One way is to look for mutual fund companies who have demonstrated their willingness to close funds to new investments. But be careful here. You have to make sure they are really closing the funds and not merely setting up a sister fund. In the best cases, the mutual fund company will not only cap the size of the fund, but it will return capital to the shareholders to maintain that cap.
FN: This is “Fiduciary September.” Quite a few fiduciary standard advocates have expressed concern that regulators might “water down” the fiduciary standard in order to appease political lobbyists from the brokerage and insurance industry. What the most important take-away you can relay to the readers on this?
Golden: I really wish this standard will get adopted. The real issue is that the average investor doesn’t know what it is and, if they do, they assume it’s already in place. We need to bring the reality in alignment with this perception. I have hope and faith it won’t be watered down.
FN: The Institute for the Fiduciary Standard recently awarded this year’s Tamar Frankel Fiduciary Prize to David Swensen, Yale’s Chief Investment Officer? You’re on the committee that helped make that selection. In what ways has Swensen demonstrated the need for a uniform fiduciary standard that our readers might not be aware of?
Golden: Dave is deserving of this award for many reasons. It’s well known that he and his colleague Dean Takahashi have instigated a revolution in endowment management. It’s hard to point to any industry that has changed as much. Dave has been inspirational to a generation of endowment managers to, not just by putting the clients’ interests first, but by fighting for the clients’ interests. Dave wrote two important books, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment and Unconventional Success: A Fundamental Approach to Personal Investment. In these books, he drives home the idea that there is no such thing as a great investment portfolio in the abstract, but there are great portfolios for individual circumstances. This concept underscores the importance for the fiduciary to emphasize the specific circumstances of the individual clients, not the dictates of a generic investment theory.
FN: This last point is particularly intriguing as it harks back to the original mandate every trustee had in working with a beneficiary. Andy, thanks for taking the time to share your thoughts and ideas with our readers. I know I’ve got some great story ideas from this interview. I trust it’s been just as enlightening to them.