Fiduciary Fallacy #172–Financial Advisors Are Personal Chefs, Not Doctors (Even The Brightest Of Us)
This is a second follow-up to an article I questioned the author Bob Clark’s claim that regulation on advisors is not a “political issue” and provided a lengthy response on all of the political positions and statements that I saw in his writing. His response is posted here.
Fiduciary supporters believe that government regulating financial advice will put them in a category of professionals and raise their value to the public. Bob frequently uses doctors as an example.
Interestingly, Bob makes a point that I frequently use to defend my position on Fiduciary. He states that wouldn’t it be wasteful if doctors were unregulated and recommended procedures for profit rather than a client’s interest.
But that’s exactly what happens in a regulated market, not in a free market!
We have an opioid problem in this country. Not entirely, but partially because doctors know they can make simple recommendations for drugs that do not solve the problem, but mask the pain.
Likewise, the Fiduciary Rule will require so much from financial advisors to justify simply working with a client that chose them… they have to perform hours of tests that provide no value to the client.
And, so Bob’s point on doctors interestingly works entirely against him. Doctors do plenty that is simply mandated to put cost on doctors and hospitals, which reduces the demand of doctors, which reduces supply, which means people are sicker, and have to pay more for the doctors who are available!
Which is exactly what Fiduciary is doing right now to financial advice. It’s not a theory. Advisor costs are rising, advisor firms are moving to work with higher net worth clients and reducing fees. Advisors are doing unnecessary tests, and giving simple recommendations that they don’t really believe in.
The result will eventually be that state-managed retirement accounts and simple advisor systems like online advisors will take over the market. Clients will not be happier with less choice.
These systems like drugs will not solve the client’s problems, but will cause them to not seek personal advice. They likely won’t be able to afford it either in a regulated market, just like only the rich have personal attention in regulated health markets.
The reason the analogy of the doctor fails however is that doctors are a necessity. Regulations make limit their use by the public, they may increase costs, and they may give solutions that sometimes just mask pain rather than provide an actual cure. That is caused by regulation, not in spite of it.
A more appropriate analogy is that of a personal chef.
As an advisor, I bring a certain background to my client relationships. I am a CFP® professional, I have an interest in economics, and a background in taxes and holistic planning.
Other ‘personal chefs’ have experience in other areas, and I outsource to those areas. I pick products and service professionals that I think are appropriate for my client’s needs.
But, as the state-run investment programs and robo-advisors know, I am expendable. Unlike the doctor, I can not charge an unlimited amount. Like a personal chef, if I did, my clients would choose fast food or to cook themselves.
WHICH… is a result we can see with our own eyes with the Fiduciary Rule. More will be choosing those options (or, in the case of OregonSaves and other state plans, they will be forced to use state ‘food stamps’ and pay as much as an advisor, with no advice).
Regulation does not ‘make a profession’ or service. It can destroy them. Dodd-Frank has destroyed community banks. The ACA has destroyed many independent physicians, small hospitals, and insurance companies.
The Fiduciary Rule is especially sinister in that it targets advisors at the time that clients want help and actually want to move their accounts to an advisor. It requires advisors to justify a client choosing them – as a personal chef – by having the advisor prove they are better than a fast food menu at a low-cost (and, it’s even worse because as Mr. Clark points out in his article he is very concerned with the cost of personal chefs and thinks government should reduce them).
If I were able to hire a personal chef, I should be able to. If I want to hire an advisor, I should be able to. I shouldn’t have an advisor charge me or refuse my business because government says his company plan is cheaper and better than me.