Fee-Only Investment Advisory Firms: Not “Fee-Based”

Fee-only investment advisory firms and fee-based investment advisors sound like the same thing, right?

Fee-only investment advisory firms are often misunderstood for “fee-based” advisors.  Although they do sound very similar, there is a huge difference between the two terms. And the impact on a client can be very different. See, in the investment universe, there are a lot of ways to “define” your business. When Tom was a stockbroker years ago at Morgan Stanley, they did not even WANT to refer to them as “stockbrokers.” But the reality was they worked on commission. Which brings an inherent conflict of interest with their recommendations.

Fee-only investment advisory firms, like Mullooly Asset Management, will charge a fee which is agreed upon in advance and is based on the value of the account we manage for the client. Fee-ONLY Advisors almost always use discount brokers (we use TD Ameritrade and Charles Schwab) to keep transaction costs as low as possible. However, clients can have their accounts with any broker they please. We are the manager, the broker merely effects the buy or sell transaction… so why not keep costs as low as possible?

Additionally, fee-only investment advisory firms might not charge a financial planning fee (unless a client specifically asks for financial planning services). The fee charged to manage the account is the only form of compensation fee-only investment advisory firms accept.

Fee-only investment advisory firms do not accept “trailing commissions” on mutual funds or on annuities, so it’s pretty unlikely annuities will EVER be suggested. In our opinion, that’s a better way to go. After all these years in the industry, we’re still trying to understand why individuals would invest in annuities!

Many brokers today work under “dual-registration.” These are NOT fee-only investment advisory firms. These brokers are sometimes called “hybrids.” They maintain their securities license with a broker/dealer, but also operate (or work for) a Registered Investment Advisory (RIA) firm.

These “hybrids” may seem to have a pretty mixed up way of operating. They may sometimes email clients from their RIA so they won’t fall under FINRA jurisdiction. Yet they charge commissions and sales charges for investments they sell to investors, and also can charge investment advisory fees.  How do individuals keep track… “are you recommending this to me as my broker, or as my investment advisor?”

Investors may learn some financial planners are fee-based planners. These folks are also NOT fee-only investment advisory firms. Which means they have the ability to charge their clients a fee to come up with a financial plan, then charge fees or commissions to carry out their plan.  This is an expensive way to go.  And their financial planning fees can sometimes be steep.  It’s in your best interest to always ask how your advisor is compensated.

Fee-only investment advisory firms have one more distinct difference: a fee-only advisory firm takes a greater fiduciary obligation to their clients — they must always act in the clients best interest. All other actors in this industry merely conform to making sure all recommendations are “suitable.” There is a very big difference between a prudent recommendations and suitable recommendations.

Please do not let the industry blur the lines for you. When you become involved with an investment manager, you need to know whether they are fee-based, dual-registered, or if they are one of the many fee-only investment advisory firms like Mullooly Asset Management.