Butchers, Dieticians, Brokers, and Advisors

Posted by Michael Kitces on Wednesday, March 28th, 1:14 pm, 2012 in Planning Profession

In the ongoing debate about the fiduciary standard, it continues to be difficult explaining to the public just what fiduciary is and means, and how there's a difference between brokers who sell products and fiduciaries who give advice. A recent video by Hightower Advisors tries to illustrate the point by comparing butchers who sell meat to dieticians who give advice about what to eat; you wouldn't expect your butcher to give objective dietary advice, and by analogy you shouldn't expect your broker to give you objective financial advice, either. If you want advice about what to eat, you go to a dietician, and by analogy when you want financial advice, you go to a fiduciary. Yet while the video does a good job drawing the distinction between brokers and fiduciaries, it perhaps unwittingly implies that recent regulatory and advocacy efforts may be misguided. It would be nonsensical to pass a law requiring all butchers to become trained dieticians to give advice about eating under a uniform dietary advice standard, when at the end of the day their job is simply to be a butcher and sell meat; extending the analogy, does that mean it is equally absurd to expect a uniform fiduciary standard for brokers? Is a better alternative just to require butchers to call themselves butchers, and brokers to call themselves brokers, and let neither give advice or hold themselves out as an advisor in the first place?

The inspiration for today's blog post is the recent "Butchers and Dieticians" video created by Hightower Advisors CEO Elliot Weissbluth, and the striking analogy it makes between butchers versus dieticians as compared to brokers versus fiduciaries. As the video notes, in the case of the butcher, we trust them to sell us a good piece of meat, but have no expectation they would send us down the street to the fishmonger because fish is healthier for the heart. In the case of the dietician, though, we expect healthy advice based on our own interests and needs. In financial services, brokers are like butchers that sell financial products instead of meat, and fiduciaries are like dieticians giving advice in your best interests. You can see the full 2.5 minute video below.

Personally, I think the analogy is pretty good, although in reality Hightower isn't talking about the difference between brokers and fiduciaries, per se, but the difference between brokers and advisors. Brokers sell products; advisors give advice, which almost by definition is fiduciary. The implied point from the video: you wouldn't ask for diet advice from your butcher - because you know it's going to be meat-centric, and not necessarily in your best interests - so you shouldn't ask for financial advice from your broker, either. And arguably, in the financial context, the problem has been exacerbated by having brokers as salespeople call themselves financial advisors. To extend the Hightower example, imagine the further confusion if butchers didn't just sell meat, but did it while calling themselves dietary advisors?

To me, though, the most striking thing about the video is not simply how it illustrates the difference between brokers vs advisors by comparing butchers to dieticians; it's equally effective at illustrating the misdirection of recent advocacy and regulatory efforts.

For instance, an implicit and sometimes explicit position of many consumer advocates has essentially been that "all brokers should be fiduciaries" - and in fact, the direction of recent regulation as an outcome of Dodd-Frank has been towards adopting a "uniform fiduciary standard" for all brokers. Yet imagine extending the analogy - if butchers were giving too much meat-biased diet advice and calling themselves dietary advisors, would the best solution really be to require that all butchers become better trained dieticians so they give appropriate diet advice!? Is it really helpful to the public if you can only get a cut of meat for your dinner by going through a medical exam to get your dietary advice first? Viewed in this context, the idea of suggesting that all butchers must be properly trained dieticians giving diet advice, or they can't sell meat at all, sounds somewhat ridiculous. Their job is not really diet advice in the first place; their job is to sell a fine cut of meat! They were just using the dietary advice to try to sell more meat.

Instead, the butchers and dieticians analogy makes clear that there may be a simpler, more appropriate alternative - instead of requiring all butchers to become dieticians under a uniform dietician standard, simply tell the butchers not to give diet advice at all, and not to hold themselves out as dietary advisors when they're really just selling a fine cut of meat! In fact, apply sanctions to them if they do try to give diet advice when they aren't qualified to do so, and punish them for holding themselves out as dietary advisors when in reality they should simply call themselves what they are: butchers.

This serves to highlight the point that at the end of the day, the entire fiduciary versus suitability debate is misguided; the real choice is not fiduciary versus suitability; it's between buying products from a salesperson or getting advice from an advisor. In other words, the problem is not that butchers aren't fiduciaries, and it's ridiculous to argue what standard should apply to a butcher's dietary advice; the problem is that butchers shouldn't give diet advice or hold themselves out as dieticians in the first place. Similarly, the problem is not that brokers aren't fiduciaries, or what standard should apply to the advice that brokers give; the problem is that stockbrokers (and insurance agents, and other financial products salespeople that stopped calling themselves what they are and started calling themselves 'financial advisors' and 'financial consultants') shouldn't give financial advice or hold themselves out as financial advisors or consultants in the first place. Which means in the end, the solution is not to make butchers into dieticians or brokers into fiduciaries; it's simply to draw a clearer distinction between who is a fiduciary advice-giver and who is a product salesperson, by calling a butcher a butcher, a broker a broker, and the only people who hold themselves out as advice-givers - regarding diet or finances - are the advisors.

This lets the public have the same choice when consuming meat or financial services: if you know what you want to buy, get a salesperson to buy it from; and if you want advice, get it from a true advice-giver. You don't expect credible and objective advice about alternative products from your butcher, and nor should you expect it from your broker, either. Yet just as the butcher and dietician do co-exist in a spectrum of services available the public, so too can the broker and the financial advisor... as long as each sticks to their respective role.

So what do you think? Does the butcher and dietician analogy resonate with you? Do you think the best solution is to force all butchers to become dieticians, or simply to bar them from holding themselves out as dietary advisors and giving diet advice in the first place? Does the parallel hold true for brokers and advisors, too?

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  • http://www.healthywealthyfamilies.net Hilary Martin, MBA, CFP

    I like the video, and actually I'm going to ask those folks if I can put it on my blog, too. I think the analogy is a powerful one. The most important thing is that it helps people understand the fiduciary distinction.

    No, don't force butchers to become dieticians. And don't force brokers to become fiduciaries (how in the world could they accomplish that). The difference is that people UNDERSTAND MEAT, they don't understand investment products. So I'm not really sure the butchers of the investment world are appropriate for Joe Public at all.

  • http://www.oliverplanning.com Rob Oliver

    Well said, Michael. The public should learn to ask a potential "adviser" if she is an advice-giver or salesperson, and then ask the person to describe all the ways in which she is compensated. That alone would cut through much of the jargon (suitability, fiduciary, fee-based, fee-only) and pseudo titles that most of the public do not understand anyway.

    • http://www.facebook.com/profile.php?id=100003406001215 Aysel

      I think it's important to note that most of the potnteial lawsuits get settled, so they never end up in court, especially among smaller plans. And there's a reason that plans are now submitting their Form 5500 electronically. The government has good technology too, and they are using it to help identify plan deficiencies. They aren't beefing up field staff just to help the economy either, they know that plans have problems and intend to do something about it.

  • http://www.principalwealthllc.com Michael Rivas

    One side strives for clarity, one side intends to confuse... separate and divide could be a true consumer benefit.

  • Ron Rhoades

    Good article, and good video.

    The problem of inability to distinguish fiduciaries from non-fiduciaries stems from the SEC's refusal in 2005 rule-making (remember the Merrill Lynch fee-based accounts rule) to require those that use titles that denote dieticians (relationships of trust and confidence), such as "financial consultant," to be fiduciaries. Also, through SEC rulings and recent court decisions, the "solely incidental" exemption for BDs has nearly swallowed the definition of "investment adviser."

    I concur that product salespersons can exist - if they confine their activities to selling products. But where to draw the line? Describing a product is one thing. Stating that "this is a good product for your situation" becomes personalized advice, and would appear to cross the line into the realm of fiduciary advice. So - how many investments salespersons would be able to confine their sales pitch to product descriptions?

    Yet, we have the requirement that information be gathered for the customer of the BD to ensure "suitability." While a much lower standard, this requirement still imposes a requirement that the registered representative gather facts from the customer and determine the "suitability" of the product for the specific customer. Again, this comes close to "crossing the line." (However, a determination of suitability is an internal determination that does not require, necessarily, communication of that determination to the customer).

    We must recognize that this is not the butcher shop in which Americans live their financial lives. It's a complicated financial world, full of traps for the unwary as well as opportunities for those advised upon by astute advisors.

    How many times has a client come to you seeking investment advice, only for you to tell the client to use the funds available to pay off personal debts first? This is just one example of why investment advice, for a retail client, should nearly always be preceded by financial planning.

    We could all try to re-create the world, with a new statutory scheme for the regulation of investment advice and financial planning - in a functional manner. BUT such is unlikely until the next major financial crisis (major changes from Congress tend to follow crises). Hence, for the present and foreseeable future, we now live within the confines of Dodd-Frank and its extensive grant of authority to the SEC.

    And we also live with the understanding that disclosures don't work. Once a relationship of trust is established with the client (which financial advisors of all types are trained to do - in order to sell their service or products), behaviorial biases of the client/customer result in gross inattention to disclosures.

    The question remains ... where to drawn the line between product descriptions and advice. Dodd Frank, while not the legislation preferred by fiduciary advocates, grants extensive authority to the SEC to "move the fiduciary line" a long way - for the protection of the public.

    Let us only hope that, as they move the line, the SEC does not weaken the fiduciary principle. In summary, the fiduciary principle provides that the ends of the client are assumed by the fiduciary as his or her own (save the exception of reasonable compensation, agreed-to in advance, and preferably some form of level compensation).

    My 2 cents, for now.

  • http://www.lwmwealth.com Robert Henderson

    Your article makes a lot of sense in theory. The challenge our industry faces is that virtually all wirehouse and other captive B/D's (ie. Edward Jones, Stifel, etc.) run a hybrid model - ie. their advisors act as both "brokers" through their B/D, but also as fiduciaries through their firm's RIA. In this day and age, most captive advisors I know maintain both commission AND fee-based accounts - and sometimes even for the same clients.

    So the difficulty becomes deciding which hat you wear and when - and then how you communicate that to clients and the public in a meaningful and understandable way.

    I am not sure if you are suggesting abolishing the hybrid model, but in some ways I am not sure it accomplishes the right goal. I myself am fee-only (though I am still insurance licensed to do life and LTC insurance for clients), but I can see where taking away the ability to do commission business can actually reduce the "objectivity" of our advice.

    Our industry is at a cross-roads, and I think we need to find a way to move beyond this issue and deal with how we help our profession evolve.

  • Geoff Davey

    This morning I listened to The National Society of Compliance Professionals' one hour webinar from West LegalEdCenter on the New Broker-Dealer Suitability Rules (for which I paid $120). The presenters were both the lawyers, one from a law firm and the other in-house at RBC. There was no talk of "advisers" and "clients" but rather of "salespeople", "salesforce" and "customers". Much was made of the substantial retraining that would be required for "your salesforce". Yet when I went to the RBC website there was no talk of "salespeople" or "customers" but rather of "advisers" and "clients".

    Of course, this is not news, but it is deception on a grand scale. As an outsider, I'm from Australia, I would look on in disbelief were it not for the fact that such behaviour has been par for the course for the 30 years I've been watching.

  • Nancy Flint-Budde

    This is a very helpful analogy however most planners do untimately sell product (commission or fee based)when they implement their advice. I consider myself an advisor first and am comfortable with the fiduciary title but my income comes from commissions and fees. I think, regardless of title, a person should have the choice to hold themselves out as an advisor (subject to fiduciary standards) or be required to disclose in writing that they are not and face regulatory penalties for misrepresentation.

    • http://www.healthywealthyfamilies.net Hilary Martin, MBA, CFP

      I thought that "fiduciary" was a legal standard. I'm not sure how someone who earns commissions can be considered a fiduciary, whether you are comfortable with telling people you are or not.

      • Michael Kitces

        Hilary,
        Technically, fiduciary is defined by its process, not its compensation.

        For instance, lawyers generally function with a fiduciary duty to their clients, but many are paid by contingency fees, which is structurally identical to a commission.

        The issue is the advice that's given and the process used to arrive at that advice. Not strictly the compensation model.
        - Michael

        • http://www.healthywealthyfamilies.net Hilary Martin, MBA, CFP

          So then why don't UBS guys call themselves Fiduciaries?

          • Michael Kitces

            Likely because they don't want the legal liability of being held accountable to a fiduciary process. And it doesn't really fit within our existing regulatory infrastructure. We have no current framework to regulate a "fiduciary broker", and a fiduciary investment advisor is a fiduciary but also entails some specific investment advisor functions that aren't necessarily being provided. Beyond that, UBS may not call themselves fiduciaries simply because, frankly, I don't think it's useful to market "fiduciary" anyway, as I've written previously on this blog.

            But the underlying point is that "no commissions" is not the ONLY way to define fiduciary, especially if you're writing laws and regulations with a blank slate.
            - Michael

  • http://www.healthywealthyfamilies.net Hilary Martin, MBA, CFP

    Thanks. Understood.

  • Robert Vogel

    I agree with you that trying to broadly apply a fiduciary standard is nonsense. In fact, we know it is impossible and so what they will come up with is some sort of watered down standard that won't help anyone (the brokerage industry is well-heeled after all, and money talks!) This will take away an important point of differentiation for those who do strive to work under a fiduciary standard. Says the broker/insurance agent/financial salesperson "We all are under a 'fiduciary' standard (wink,wink..nudge,nudge)" Now we will have the task of explaining a 'true' fiduciary standard from whatever travesty the political process creates.
    I would like to think that ex- title, compensation arrangement, or a unified standard, the financial credential industry would help fill in the gap for consumers. But is seems to me that no one has yet taken the position that if you do not work under a fiduciary standard (other than personally (wink,wink...nudge,nudge))you cannot use our marks. As long as you pay the fee and pass the test, you can put whatever alphabet soup you want after your name, and consumers are supposed to be able to figure it out. How about a credential that a captive salesperson cannot use because he is a captive salesperson, regardless of what he calls himself. I used to work at a large mutual fund complex that had a 'planning' group. In fact it is where I received my planning credential. We recommended only the firm's products and our asset allocation, as luck would have it, only included asset classes that the firm offered! Later, as they realize how unprofitable planning can be at their required scale, they moved to a model where clients enters their info into an online portal and a 'plan' is spit out on the other end. The 'planner' then has a phone conference with the client about the 'plan' that he had no hand in producing and often sees no more than 15 minutes before the scheduled call. Yet we all carried a 'planning' credential. In fact I think they actually boast about how many credentialed planners that have. At least the price point is set correctly, since most of the plans generated then and now are free.

  • Joseph A. Smith

    Again you started an excellent discussion. One of my observations from discussions with brokers is that they believe they can move from one status to the other at will. To simplify, they wear one hat when gathering information and another when they are selling (recommending) a product. Some think that if the 2 functions are in separate meetings or discussions they have separated the 2 functions. Many financial firms seem to have a “Chinese wall” between the two functions. The one person is a planner; the other person is a sales person. The discussion with the client shifts from one person to the other.
    How can the separation be defined and “regulated”?

    • Michael Kitces

      Joseph,
      The "2 hats" approach is not a fundamental fiduciary principle. It's actually a regulatory approach that has emerged BECAUSE of the fact that we regulate advice simultaneously under two different standards.

      Part of the fundamental point of a uniform fiduciary duty is that there IS no more "2 hats" scenario. If you provide personalized advice, the fiduciary hat is on, and it stays on forever. If you want to avoid the fiduciary hat, you would need to NEVER give advice to become subject to it.
      - Michael

  • http://www.mfac-bizmgt.com Mitchell Freedman

    This is an interesting thread. I think that the butcher analogy is apt. And, since I worked my way through college as a butcher low those many decades ago I understand the difference between an advisor and a mover of inventory.

    The article has made me think that perhaps those of us who are RIAs who both hold out and are subject to a fiduciary standard have been shooting ourselves in the foot. We don't really want brokers to become fiduciaries. If they do then it will be harder to explain the difference to prospects and clients.

    Thanks for bringing the article and video to our attention Michael

    • Michael Kitces

      Mitch,
      Thanks so much for your comments.

      And indeed, I wrote about this final point you made on the blog last year - if financial planners win the fiduciary fight, the irony is that it will likely increase the number of 'real' financial planners they compete against, and eliminate their ability to use fiduciary as a differentiator. http://www.kitces.com/blog/archives/140-If-The-Fiduciary-Fight-Wins,-Does-Your-Marketing-Plan-Lose.html

      While I believe that's a good thing for consumers in the long run, it could actually make life more difficult for many planners in the short run, who would need to find new ways to distinguish themselves!
      - Michael

      • http://www.mfac-bizmgt.com Mitchell Freedman

        Michael, brilliant minds think alike. LOL

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