HighTower's Weissbluth Contemplates Why Brokers Are Like Butchers: The Weekend Interview

Fiduciary responsibility for brokers? "A change of regulation can't convert butchers into dietitians"

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Since its founding in 2008, HighTower Advisors has expanded at a brisk pace--with 15 new partnerships and counting, many of them from breakaway wirehouse advisors from New York, California and, of course, Chicago, where HighTower is headquartered.

Chicago, according to poet Carl Sandburg, is the city of big shoulders, hog butcher for the world, "with lifted head singing so proud to be alive and coarse and strong and cunning." These are words that may not sit well with Wall Street firms-- UBS, Merrill Lynch, Morgan Stanley, Bear Stearns/JPMorgan, and Goldman Sachs among them--that have seen advisory teams and wealth management units depleted as their talent breaks away to join HighTower.

Perhaps unsurprisingly, considering HighTower's phenomenal growth, the firm has been the subject of lawsuits. Morgan Stanley Smith Barney sued HighTower in February, accusing it of stealing advisors and clients. And one of the firm's advisors, Curtis Lyman, formerly of Lehman Brothers, was sued this spring by investors in Florida for investing their money in an alleged Ponzi scheme run as a feeder fund by a disbarred lawyer sentenced in June to 50 years in jail.

HighTower CEO Elliot Weissbluth in an April 1 interview with Reuters gave his "unreserved" support to Lyman, saying, "Curt Lyman is as much a victim as the other Ponzi scheme victims." More recently, when asked for an update, Weissbluth said that in the time that has passed, everything new he has learned since April 1 only makes his comments to Reuters more relevant.

"These investments, initiated prior to Curt Lyman joining HighTower, were made in a fee account," Weissbluth said in a statement. "Mr. Lyman did not have any economic interest whatsoever in placing these funds with the feeder fund."

In the years since its founding, HighTower has expanded to about 100 employees, 15 teams, and 30 managing director-financial advisors. Ranked No. 1 in Wealth Manager's Quarterly Pulse Ranking for Q3 2009 of largest RIA firms by assets under management, HighTower reported AUM of $15 billion and 7,334 clients as of Sept. 30, 2009. Since then, HighTower has announced a number of new partnerships, most recently with a $1 billion New York team from UBS and a $740 million Silicon Valley team called Three Bridge Wealth Advisors.

'The lamb chops are really spectacular'

Weissbluth, who began his career as a practicing attorney in Chicago, made it clear in an August 2 interview with Investment Advisor that he welcomes breakaway brokers into his firm and that he supports their hard-won spirit of independence. When the issue of fiduciary responsibility came up, Weissbluth's thoughts took a metaphorical turn and--Chicagoan that he is--he compared brokers to butchers in arguing that regulators should tread lightly before imposing too many fiduciary restrictions on brokers.

Investment Advisor: Tell me your thoughts on the issue of fiduciary responsibility.

Weissbluth: I think the fiduciary responsibility has provoked a lot of questions and sparked a lot of conversation about what it really means to put your client first. The large firms are simply not in the business of upholding a fiduciary standard, so it's going to be very difficult for them to adopt a fiduciary standard without significantly changing their businesses, which I don't think is tenable.

While there's been a lot of conversation--and just by background, I'm a recovering lawyer, so the concepts of fiduciary standards are something I have a particular sensitivity to--a fiduciary standard is not something that can simply be regulated and enforced on an entire industry.

The analogy that I use, and I don't say this at all in a pejorative way, is if you were to go to your high-end butcher because you have friends coming over for a barbecue on Saturday and you want to get some really good tenderloin. You say to Sam the Butcher, "I was thinking about getting tenderloin," and Sam says, "You know, the tenderloin is good, but the lamb chops are really spectacular."

You're there getting really good advice from somebody who's selling you a product, right? And he's doing you a service, and you rely on him and you enjoy the interaction, and you don't mind being sold meat by a very high-quality meat purveyor. But he's not your dietitian, right? Sam's never going to recommend salmon because it's got Omega-3s and lower cholesterol.

People get confused, I think, on whether somebody's selling them a product or really has their health, you know, the health of their overall portfolio at interest. So a fiduciary has to be a dietitian, a fiduciary has to care about the entire person. A broker simply has to sell you a suitable product.

IA: And that doesn't necessarily make it a bad product, but it's what he knows. He's a butcher. He knows meat.

Weissbluth: Correct. That's exactly right. And I think that it is a little bit simplistic to think that a change of regulation can convert butchers into dietitians.

IA: (Chuckle.) Huh. And you say that with your legal background.

Weissbluth: Yes. I say that because people that go into professions go in accepting a certain expectation of how they conduct themselves. Butchers have a lot of pride in what they do, right? Good butchers, and I think my butcher in my neighborhood's a great guy, and I trust him.

IA: You're a Chicago man, aren't you?

Weissbluth: Yeah, right. This is not pejorative. This is not being judgmental that people who sell products are bad. We are commercial animals. But to ask a butcher, or to ask a broker, to suddenly change and now become a fiduciary is something that I think has to really be examined carefully to see if it makes sense.

IA: Well, it's under study now, isn't it?

Weissbluth: It is. I think it's worthy of some very thoughtful conversation and not a lot of simplistic answers where people come up with ideas that will end up only confusing or further compromising the investor's well-being.

IA: Well, you're certainly in an interesting position to make those comments, considering that you're scooping up a lot of breakaway advisors.

Weissbluth: Yes. Agreed....We're publishing a white paper on the rebuilding of Wall Street.

IA: When are you going to publish that?

Weissbluth: I don't think it's coming out for awhile, but we've certainly been talking about themes that are going to be in it, and obviously one of them is what really is better for the end client.

IA: Is it something you plan to submit to the SEC?

Weissbluth: I don't think so. You know, I think we are observing eagerly the debate that's happening at the regulatory agencies, but I think there is still work to do to educate people on what solutions will really produce an increase in investor confidence and what solutions will really be good for the end client. I don't have any agenda to join the regulatory conversation, but we do want to focus on the teams that we bring over and their clients.

IA: Have you found that they generally are bringing all of their clients along with them when they make the switch?

Weissbluth: Yes. We've had very, very high retention rates.

IA: So it's the person, not the company, which goes back to the issue of trust.

Weissbluth: Correct.

Read a story about the Morse, Towey & White partnership from the archives of InvestmentAdvisor.com.

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