Comparing Registered Investment Advisors and Brokers

by | Jul 25, 2017 | Asset Management

Mullooly Asset Management, Inc. is a Registered Investment Advisory firm.  We focus on investment management and financial planning for our clients.  There is a world of difference between brokers and advisors.  Sometimes (it seems) only advisors are aware of these differences. The industry needs to do a better job educating the public about these differences when comparing registered investment advisors and brokers.

Registered Investment Advisors (RIA) are not the same as brokers. Registered Investment Advisors do not work for a brokerage firm, they work only for their clients.  Brokers (sometimes their title is “financial advisor” or “financial consultant”) are responsible only for transactions in an account, and are paid on commissions. Brokers are not supposed to provide investment advice (although they attempt to). Sometimes the commissions a broker receives are “wrapped” to resemble a quarterly fee. But read the fine print: these “wrap” fees (at a brokerage firm) are fees — in lieu of — commissions.

When working with Mullooly Asset Management for investment management, two things are constant.  First, clients sign a discretionary investment agreement. This means clients are hiring Mullooly Asset Management to make investment decisions and the overall direction of their accounts.

Next, as a fee-only registered investment advisory firm, we do not (and cannot) accept commissions.  The only form of compensation we receive is the quarterly investment management fee (or the financial planning fee), our clients pay us. There is no incentive to generate lots of transactions.  We receive nothing from our brokers (primarily TD Ameritrade and Schwab) and receive nothing from the investments where we place our clients’ money.

This is often not the case with brokers, as brokers may receive incentives for choosing one investment over another. Recently, Morgan Stanley dropped Vanguard funds from the menu their brokers can offer their clients.  Vanguard refused to enter into a revenue sharing arrangement with Morgan Stanley.  Fee-only investment advisers like Mullooly Asset Management are free to invest in the best possible choices available to us and to you, our clients — without conflict. And many of the best possible choices are often among the lowest cost options, too.

Under what circumstances might you pay a commission?  When a change in direction is warranted, either due to a change in your circumstances or due to changes in the market, commissions may be charged by the broker (not the advisor).  We aim to keep your transactions costs as low as possible.  Paying a small commission is the cost of doing business with a brokerage firm (like TD Ameritrade or Schwab). And this is a big reason why we choose to work with firms like TD Ameritrade and Schwab: their commission rates are some of the lowest in the industry.  Some discount brokers (like TD Ameritrade and Schwab) have begun to offer some investments on a commission-free basis.  When we find one of these which fit the needs of our clients, we will often opt for a commission-free choice. And the service we receive from these discount brokers is excellent.

Additionally, there are many “fee-based” advisors in the industry. Understand “fee-based” and “fee-only” are NOT the same. If a firm peddles mutual funds to their clients and collects trailing fees (residual commissions) from the mutual fund company, they are NOT a “fee-only” advisory firm. If an advisor collects a fee, sales charge or commission for the sale of life insurance or annuities, they cannot possibly be a “fee-only” advisor. If an advisor accepts a commission on a transaction, they are not a fee-only registered investment advisor.

Here is why all of this matters: as a Registered Investment Advisor (RIA) firm, we act as fiduciaries to our clients. A fiduciary is someone who has the legal obligation to do what is right for the client – like a lawyer, doctor, or accountant.

Brokers do not have the same fiduciary obligation to their clients.  Let’s be clear: brokers do not have an obligation to act in their clients’ best interests. Stop and think about that for a moment.  Investors are often stunned when they are informed brokers do not have the same fiduciary obligation as an investment advisor.  It’s pretty tough to serve as a fiduciary when you are dependent on your client to generate transactions and commissions.

There are proposed new regulations in place (since June) from the US Department of Labor (DOL), to attempt to enforce a fiduciary model for brokers. The brokerage community is fighting these regulations with everything they’ve got.

Recently, I was asked by NASDAQ to speak as part of a panel, to inform the community what life will be like when the DOL laws become effective.  It’s easy for a Registered Investment Advisor like Mullooly Asset Management to operate under the terms the DOL is proposing: other than a few small changes, we’ve been doing it this way all along.  And these changes proposed by the DOL are only for retirement accounts with brokers, not for all brokerage accounts.  By contrast, Registered Investment Advisors are held to a fiduciary standard on ALL accounts.

I didn’t learn about the differences between brokers and advisors by reading a book: I’ve spent nearly equal amounts of time in my thirty-plus year career on each side.  In 2002, after roughly sixteen years as a broker (and serving as a producing manager in a broker’s office), I saw the writing on the wall very clearly.  The broker model (generating commissions and peddling products), was on the way out. I started Mullooly Asset Management back in 2002 to work on a fiduciary, fee-only platform with my clients, remove conflicts of interest, and work on the same side of the table as my investment management and financial planning clients.

Along with my three sons who serve our clients as investment advisors, I welcome the opportunity to discuss your situation and help you plan for the future.

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