Fiduciary Investment Advisors and Brokers: More Differences

by | May 30, 2014 | Asset Management

We have yet another example of differences between fiduciary investment advisors and brokers. We recently discussed how the “game plan” at so many big brokerage firms had been to “wrap” folks up into mutual funds.

Often these are funds that generate great fees, but may not be so great for you.

We even put together a quick video, which you can watch here.

Now, Josh Brown, who writes The Reformed Broker, penned a post on his site worth reading. It cuts right to the heart of differences between fiduciary investment advisors and brokers (brokers are compensated, by their firm, to sell). Josh Brown (like me) WAS a broker at one point in the past, now Josh (like me) runs a fiduciary investment advisor firm. Warning, Josh uses strong language on his web site.

At one point, Josh wrote: “this is why you rarely see fiduciary advisors getting excited about black boxes and unorthodox strategies – even when wrapped inside a friendly mutual fund casing. But brokers on the other hand…”

Brown goes on to describe how most “liquid alts” — which are complicated alternative investments (as an example) to owning bonds, — are products sold through brokers at full-service brokerage firms, and often not sold through advisors who have a fiduciary obligation to their clients (like we do). To explain, the vast majority of sales of these complicated investment vehicles are made through brokers, not investment advisors. Mostly because advisors have a fiduciary obligation to manage their client accounts as if they were handling their own assets. And, secondly because fiduciary advisors are not usually paid to peddle that. Fee-only advisors (like Mullooly Asset) are paid only by their clients.

“We see here a stark contrast between the brokerage model and the advisory model, through the lens of a predilection for complex, expensive products.

The broker who sells liquid alt funds gets paid on those fees while the true financial advisor … only gets paid by the client, never receives compensation from the fund family.”

I know we’ve mentioned this frequently, but ask, ask, ask if you see something in your account that has not been fully explained (in terms you can understand!). Every broker and advisor in the business owes their client that much. And know how your investment advisor is compensated. There are many differences between investment advisors and brokers. How your advisor gets paid (versus how a broker is compensated) is a big difference.