7/12/13 9:27 AM – Why Use a Fee-Only Adviser?

Someone recently asked me the difference between working with a traditional stockbroker and a fee-only RIA (registered investment adviser). Well, I do have a web page at left devoted to this but let me cover it here a little differently.

1) Independence – An RIA is usually either his own firm or more commonly part of a small firm, but the key is independence – no more pressure from above to sell certain products, especially the “house brand.” No pressure to cold-call. I remember that my office manager at a national brokerage firm was livid when I started an evening MBA program. He felt I should have been in the office cold-calling prospects.

2) Not a Sales Culture – This is really hard to over-state. For RIAs there are no more sales meetings, no sales manager, no sales contests, no sales goals to “make your month.” A fee-only adviser does not even get paid to sell products. Instead, we are paid a small fee each quarter for providing service and advice based on independent research and our experience.

Brokerage firms track commissions by the minute but most don’t track client investment performance. That should tell you something. Think it doesn’t matter that a broker gets paid differing amounts on the various products he might recommend to you or that certain products might get him a free trip to Hawaii? If not, it’s too bad you can’t sit in on their daily lunches when stockbrokers tend to share their success stories.

3) Transparency – Brokerage firms do a lot to hide their costs, making many products seem like no-cost products. It ain’t so. Furthermore, it’s deception. For my part, I send out a quarterly email showing the exact fee and how it was calculated. And, I accept no freebies like free trips and dinners and golf from firms wanting me to push their funds or their services.

4) Safety – Which has the potential to be more dangerous to you or your mom’s wealth – a) someone who gets paid for sales activity that he controls because he is seen as the expert but who might get paid as much as 10 times more to sell a certain product, or b) the person whose income does not change based on activity and whose income grows only as the account grows or he gets referrals for providing great advice and service?

5) Experience – Independent advisers tend to be much more experienced. No one hangs out a shingle right out of college. Instead, they go to a brokerage firm to get started on salary and transition over to straight commission.

When you want to go independent it can a huge drop in income from getting paid 4% on average to sell a mutual fund or annuity or some other product, 7% on limited partnerships, and killer commissions on insurance to dropping down to a tenth of a percent per month total compensation (less when you figure in large clients). Then deduct the overhead of having your own shop. And, forget all-expenses-paid reward trips to fancy hotels at hot destinations.

6) Fiduciary Standard – Most stockbrokers are not allowed by their firms to be fiduciaries in which every action must be in the client’s best interest. But, for an RIA that is the standard of care. It is a much higher ethical standard than just having to recommend suitable products.

7) Better regulation – RIAs are routinely audited on a surprise basis by either the state or the SEC to ensure that they are adhering to the rules. And, they must disclose online any disciplinary measures, lawsuits or convictions. A disclosure document detailing mandatory information about their firm must be given to every new client and offered annually. You won’t get that kind of disclosure from a stockbroker.

In contrast, when I was a stockbroker back in the 1980s I remember the office of 20 brokers getting an audit, the only one I remember in 10 years and it was just an internal audit. I was shocked when a clean bill of health was given. I knew horror stories were routine in that office and I actually quit the industry in disgust. Looking back, I should have gone to regulators or the newspaper. I came back a year later, vowing to be an independent practitioner paid by quarterly fees only. I’ve been an independent fee-only RIA now for 18+ years.