HighTower Advisors, a Chicago based registered investment advisor, recently published a very clever whiteboard animation titled “Brokers vs. Fiduciaries.” In the video, HighTower CEO Elliot Weissbluth describes brokers as cleaver wielding butchers. The video implies that the butchers would be content if you eat nothing but red meat until you keel over with clogged arteries, comparing them to brokers. On the other hand, the video portrays fiduciaries (presumably referring to registered investment advisors (RIAs)) as dietitians who thoughtfully prescribe a balanced diet and want to see you live forever.
Anyone who watches the video (which can be seen on YouTube) will be surprised to learn that HighTower is affiliated, through common ownership, with HighTower Securities, a broker-dealer. That’s right, these dietitians own a butcher shop. And, according to HighTowers’s Form ADV, “HighTower may have an incentive to recommend programs that generate revenue for HighTower and its affiliated broker/dealer over other programs…”
The murky world of dual registration
Welcome to the world of dual registration, where sales representatives wear two hats. On one hand, they are brokers collecting commissions and all sorts of other goodies (12b-1 fees, trailer commissions, etc.) and on the other hand they’re registered investment advisors (fiduciaries), which allows them to also collect hefty ongoing asset-based fees. Financial service providers love dual registration because they get the best of both worlds; they can have their cake and eat it too.
But brokers and RIAs are governed by two separate Congressional Acts, and we believe Congress never intended for the regulatory boundaries that separate brokerage activities from RIA activities to become blurred. With dual registration, when the dietitians either own or moonlight at the butcher shop, these regulatory worlds collide and investors are forced to navigate a minefield of inherent conflicts of interest.
In the eyes of investors today, there is very little transparency regarding who does what and who, if anyone, is genuinely looking out for the investors’ best interests. The underlying distrust of the financial services industry is compounded when you throw dual registrations into the mix.
The fiduciary myth
There is a misperception in the market place that when a financial professional acts as a fiduciary, all conflicts of interest between that professional and the investor have been eliminated – this is untrue. Judge Benjamin Cardozo famously summed up fiduciary duty in law in a 1928 court decision. He said: “A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honour the most sensitive, is then the standard of behaviour… the level of conduct for fiduciaries [has] been kept at a level higher than that trodden by the crowd.“
However, in the trodden crowd of financial services, fiduciary duty has become a game of merely disclosing the conflicts of interest, not eliminating them. In other words, the conflicts, or potential conflicts, are alive and well, they’re just buried deep in the fine print. And once the conflicts are disclosed, it’s fair game, so buyer beware. We suspect that Judge Cardozo wouldn’t approve that the essence of fiduciary duty can be so easily watered down.
Elliot’s two and half minute video is worth watching, but we suggest that you also take a few minutes and read through his Form ADV. You’ll find that these dietitians own the butcher shop, and every time they send you over to their butcher for a pound of ground beef, the butcher may be sending a kickback to the dietitians.
It’s our opinion that the more an investment advisor touts his or her fiduciary standing as some sort of seal of approval, than the more closely investors need to read the fine print. The devil, or in this case, the butcher, is alive and well in the detail.
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