What is a stockbroker?

A broker (stockbroker) is an employee of a brokerage firm. Brokers are compensated by commissions. In recent years, many brokers have been successful in converting their client base from paying “commissions per trade” over to a quarterly fee. This approach may not be appropriate for every single investor. Brokers are held to a “suitability” standard. Suitability means that the investments suggested to clients must fit the “investment profile” discussed and agreed upon by the client and the broker.

You need to know the primary objectives for a broker are to increase assets under management and generate revenue for their firm. There is nothing wrong with these objectives. Thomas Mullooly (founder of Mullooly Asset Management) was a broker for sixteen years and was able to help individual clients and meet the firm’s objectives simultaneously. You need to know there may be times when the broker’s interests may be in direct conflict with the client’s interests. A broker’s compensation is not tied directly to the performance of their recommendations. In other words, a broker will make their commissions, whether or not you make money or not.

What is an investment adviser?

By comparison, fee-only investment advisors often derive their fee by the value of the account. When assets go up, their fee rises. If clients lose money, their fee drops.

An investment adviser is different from a broker. While brokers must adhere to a suitability standard, investment advisers must adhere to a fiduciary obligation. There is a vast difference between these two standards.

A very simple distinction between brokers and advisers can be summed up in this way: brokers are employees of brokerage firms, advisors work for their clients. While many brokers explain they have “relationships with clients,” the fact is they receive their commission checks from a brokerage firm. Fee-Only advisors are compensated directly from clients (their only form of compensation). Mullooly Asset Management is a fee-only investment advisor.

Fiduciary Obligation

The fiduciary obligation of an investment adviser is a far more serious commitment level than the suitability standard of a broker. You can find more information on fiduciary obligations here and here. In its most basic terms, the fiduciary obligation means the investment advisor must treat your money better than his or her own money, exercising the most prudent care in choosing investments, and managing your account.

Different types of Advisers

  • Fee-based advisors: these are advisers who have the ability to work for a fee plus a commission.
  • Financial planners: there are three types of financial planners:
  • Hourly Financial Planners: these individuals will work with you to construct a financial plan and charge you an hourly rate. There is often no implementation of the plan.
  • Fee Only Financial Planners: these planners may or may not construct a written plan, but will work with you to implement a plan and charge a fee to manage assets without any commission being paid to them.
  • Fee-Based Financial Planners: these planners may or may not construct a written plan. These planners have the ability to charge you a financial planning fee and game commission from the implementation of the plan, or sale of products.
  • Fee-Only investment advisors: these advisers will not construct a written financial plan. They will work with clients on basic financial planning questions and issues. These advisers are compensated only by a fee paid by their clients, and do not receive any commissions to implement recommendations suggestions or financial plans. Mullooly Asset Management is a fee only investment advisory firm.

Other fees and charges

Often, fee only investment advisors will work with discount brokerage firms. This is to keep your costs as low as possible. While fee only investment advisors charge a fee to manage your account, there still will be transaction charges, when buying or selling securities like stocks, bonds, mutual funds. It’s important to keep your transaction costs as low as possible.

Discount brokerage firms

Fee only investment advisors like Mullooly Asset Management, do not work for a discount brokerage firm. Each year, we are required to survey different brokerage firms in order to find the best service and price for our clients. If we find our clients may be better served by moving to a different brokerage firm, we will discuss that with our clients. It’s important to recognize the distinctions: the brokerage firms merely placed the transactions for us, we serve as the adviser to our clients.

We do not receive any compensation from discount brokerage firms. However we may receive computer software or access to institutional services like block trading, to facilitate transactions for our clients. While these additional services are not considered “soft dollar” arrangements, we feel it is in our client’s best interest to disclose them.

Brokerage accounts

Clients of Mullooly Asset Management are not required to move their accounts to a discount brokerage firm. They are free to maintain brokerage accounts where they prefer. In fact, a large percentage of our clients hire us to manage their retirement plan at work (like a 401(k) account, a 403b annuity, or 457 deferred compensation plan). Under those arrangements, it is virtually impossible to move those accounts. Under those arrangements, we enter into a discretionary investment agreement and share access to the retirement account. We can then log in and make changes on our clients behalf.

How do I know you’re not Bernie Madoff?

This is a great question that more people should ask their advisor. Madoff was able to get away with his scheme because he not only posed as an investment adviser, he also had custody of his client assets through his own brokerage firm, Madoff Securities. This is why it’s important to have a separate brokerage account and separate advisory agreement.

Account Access

Can an advisor gain access to my money? The ONLY access you want your advisor to have is the ability to place buy and sell orders and the ability to deduct fees from the account. When deducting fees, many brokerage firms “collar” the amount which can be deducted at a maximum rate (often three percent). This prevents an unscrupulous advisor from deducting large fees from client accounts.

Placing Orders

There are usually two types of investment agreements between advisors and clients: non-discretionary and discretionary. A non-discretionary agreement indicates the broker or advisor must contact and gain agreement from the client BEFORE placing buy or sell orders on their behalf. A discretionary agreement indicates the advisor will place buy or sell transactions without contacting the client before orders are placed. Regardless of which agreement, it is important the client is notified (usually by mail) when transactions take place in their account. Mullooly Asset Management offers discretionary investment services for their clients.

Length of Agreement

Am I signing a long-term commitment to work with you? No, our investment agreement can be severed at any time by either the adviser or by the client. We require written notice when terminating investment relationships.

Calculating Fees

How do you calculate your fees? When we enter into an investment agreement with you, you are given a fee schedule in writing. We bill our clients on a quarterly basis. For example, when calculating assets for a client to be billed on January 1, we will total your assets under our management on the last business day in December, then apply the fee schedule, to arrive at our fee for the upcoming quarter.

Annuities

Do you dislike tax-deferred annuities? There are certain circumstances where investing money in an annuity may be appropriate. But we don’t come across those circumstances, very often. In our experience, we have found individuals holding tax-deferred annuities inside tax-deferred accounts, like IRAs. We simply don’t understand the economic benefit of putting a tax-deferred investment inside a tax-deferred account like that. Sadly, the only economic benefit (in our opinion) is for the broker who sold the annuity to the individual investor.

Deductibility of Fees

It may be possible that your fees paid to an investment adviser could be deductible. There are certain conditions. For example, you must qualify for the AGI threshold, and fees paid through a retirement account may or may not be deductible. You need to check with your tax preparer for the final call. However, one point regarding investment fees is crystal clear: fees paid to a brokerage firm (including wrap-fee arrangements) are not deductible. Fees paid to a brokerage firm, under wrap-fee arrangements are considered fees in lieu of commissions.

Online access

You can access your account online, through this website, or a direct link to the brokerage firm, which we will provide for you. You will also be able to download and print monthly statements, trade confirmations and any tax documents. Please contact us immediately if you have trouble accessing your accounts.

If you have additional questions, feel free to contact us at 732-223-9000.