“Fee-based…fee-only…same thing, right?”. We’ve heard this before, and if it sounds correct to you then the brokerage industry’s obfuscation has succeeded. Just last week, Tom and Brendan discussed why you need to ask how your advisor is compensated. With so many advisors taking the dually-registered route these days, it’s integral that you understand their business model. Another important distinction that must be recognized is the difference between fee-based and fee-only advisors. They are NOT the same thing. Tom and Brendan recap what dual-registration means and discuss the fee-based and fee-only business models on this week’s Mullooly Asset Management podcast.
Where did all the stockbrokers go? That’s a valid question these days because the 1980s-esque stockbroker working on only commissions has become increasingly difficult to find. This is trivial though because if you throw a stone you’re likely to hit a dually-registered advisor. This is where the majority of the brokerage industry has gone.
Dually-registered advisors are registered representatives of a brokerage firm and also investment advisors. As a registered representative (broker) they can make transactional commissions, trailing commissions, and sales charges. As an investment advisor they can also charge investment advisory fees, like a fee for assets under management. This creates some confusion: When are they acting as a broker and when are they acting as an advisor? Who do they really work for, their clients or their firm?
As we’ve mentioned frequently here on the site, investment advisors have a fiduciary obligation to their clients. They must manage their money more diligently and prudently than their own, thus keeping the clients’ best interest in mind. Registered representatives (brokers) do not have a fiduciary duty. They may put their own interests ahead of their clients’. For example: they could choose to recommend a mutual fund with a 5.75% front-end sales load when there’s a perfectly reasonable no-load mutual fund that would accomplish the same goal.
Fee-Based vs. Fee-Only
Many new clients come into Mullooly Asset Management claiming to have worked with a fee-only advisor in the past. Upon further inspection, we regretfully inform them that they were working with a fee-based advisor. They usually ask: what’s the difference and why does it matter?
Fee-based advisors are the dually-registered advisors we discussed above. They have the ability to charge a percentage of assets under management as an advisory fee, while also collecting sales charges, trails, and other commissions for the products they recommend. This raises the question: are their investment recommendations really what’s best for the client or is it what’s best for the advisor and their firm?
The business model that fee-based, dually-registered advisors operate under is a difficult one to trust. The term fee-based was created by the brokerage industry, and it’s not a mistake that it sounds just like fee-only. Don’t get it wrong, these advisors really are good people for the most part. It’s just that their business model is seriously flawed and purposefully confusing to clients. When they charge a front-end sales load or a trailing commission each year, this is money that never gets invested for their clients. It’s the equivalent of an instant loss. There’s absolutely no need to invest in products with sales charges when there are so many low-cost/no load alternatives.
This is why Mullooly Asset Management was established as a fee-only investment advisory firm. As fee-only investment advisors we are only paid by our clients. Our advice is totally independent of the investments we recommend. We do not receive any commissions, trails, or fees from any brokerage firm, mutual fund company, or insurance company. We bill our clients on a percentage of the assets they hire us to manage. In this business model, when you make money…we make money. Likewise, if your portfolio drops in value by 50%, we’re taking a 50% pay cut. We believe that this aligns our interests and provides a fair, unbiased way to offer investment advice.
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