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Brokers Versus Fiduciaries

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HighTower Advisors has created a great video comparing investment brokers with fiduciaries.

A broker [4] is someone who takes a fee in exchange for executing a transaction. They provide a service in return for compensation. For the most part, a broker is not a fiduciary. However, brokers – depending on where they reside, professional qualifications, company, regulatory oversight, etc. – may have certain duties of care to their clients.

A fiduciary [5] is someone with a legal duty of care [6] to the client. It is more than simply executing transactions. More as if the fiduciary steps into your shoes to try and best meet your needs.

It is an important distinction. Make certain that you always know whether you are dealing with a fiduciary or not. I am not saying never to deal with a non-fiduciary. Only that you know the difference between the two. And, if appropriate, take steps to safeguard your best interests over those of your representative (agent, banker, broker, financial planner, etc.).

Now to the HighTower video. 

Butcher Versus Dietician

In the video, the broker is a meat butcher. The butcher knows meats and if you want meat will (hopefully) sell you the best meat for your needs. I say hopefully as there must be elements of competence and honesty in the butcher. Not to mention trust between the customer and vendor. If any of those are missing, major problems can arise. The butcher is not going to sell you fruits or vegetables. Nor tell you that you should cut back on your intake of red meat for health reasons.

The fiduciary is more a dietician. A dietician should take a holistic view of your life based on your unique situation (using an Investor Profile [7] and Investment Policy Statement [8]). Then provide the best recommendations for you. Not what the dietician prefers for him/herself, or based upon what is in his/her best interest to sell. Only what is right for your specific needs.

Never Forget

As the video nicely states:

“Broker are butchers selling you product. Fiduciaries are dieticians looking after your health.”

“The problem is most people think their butcher is a dietician.”

The world needs both butchers and dieticians. As well as brokers and fiduciaries.

Use each in their place and do not confuse the two. Otherwise, it will end badly.