Fee-only Advisory

When we adopted the fee-only model in 2005, we were "out-in-front" of the industry.  In its original state, the fee-only model meant:

  1. Always acting as a Fiduciary. 
  2. Compensation solely from client fees and no other sources. 

Our philosophy is simple, if our sole source of income is our clients, then our loyalty will like solely with them. 

Since we became registered as an investment adviser, a variant of the business model has come to the forefront which is the "fee-based advisory model".  And in the process, what use to be black-and-white has now turned many shades of gray.

What is the difference between "fee-only" and "fee-based"?

A fee-only Registered Investment Adviser is paid strictly from client fees and does not receive any sort of compensation from the custodian or any other 3rd party.  This is how we are set up.  A "fee-based" financial advisor will have two securities-based licenses, one to carry-out brokerage transactions for a commission and one to conduct fee-based business.  And oftentimes, there is nothing wrong with this arrangement, unless, the answer to the following question is YES.  Does your financial professional custody commission business and fee-based business with the same broker? 

Why is this such a big deal?

1.  I can almost guarantee your financial professional is violating his Fiduciary duty by placing both types of business with the same brokerage firm. A significant piece of the Fiduciary role is to recommend a custodian that is in the client's best interest. Most fee-only advisers will use Fidelity, Schwab, TD Ameritrade or our custodian Interactive Brokers.  I can say with absolute confidence, that these firms offer a better solution for you than any fee-based custodians like Edward Jones, Merrill Lynch, LPL Financial, and Wells Fargo. By recommending or requiring a client to have his or her "fee-based" account at the latter group, the advisor is blatantly disregarding his fiduciary duty. 

2. It is impossible to delineate where an advisor's compensation is generated from when all his business is under one roof. For example, when I was recruited by a large wirehouse with a fee-based program, they outlined an explicit asset-based bonus that was applied across both fee and commission accounts (i.e. the bigger my fee book was, the higher my payout would be on my commission book).  This is an overt conflict of interest and in direct violation of the fiduciary standard.  Yet, large firms get away with these types of arrangements because of their political and regulatory connections. 

3.  No matter how "independent" your advisor's platform is, the custodian will steer business to fit their profit model.  Even when I was on Fidelity Investments' fee-only platform and I had no financial arrangement with them, they continuously sought to steer business into their funds.  I know many independent brokers that charge excess fees for holding "off-platform" accounts and/or prohibit off-platform fee business if certain minimums are not met.   

In nearly all cases, if the financial professional is conducting both fee and commission business with the same firm, conflicts exist and a true fiduciary arrangement is not in place.  It is an overt red-flag testifying to the fact that the client's needs will rarely be the first priority.     

How can I tell if my financial professional is fee-only or fee-based?

There are a couple of ways.  First, you can ask your advisor if they custody both types of accounts, fee and commission, at the same firm?  If the answer is Yes, then they are conflicted. 

Second, if their business card or website has the following verbiage: "Securities offered through...". They are conflicted. 



Interactive Brokers, LLC Disclosure

Interactive Brokers LLC is a registered Broker-Dealer, Futures Commission Merchant and Forex Dealer Member, regulated by the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), and is a member of the Financial Industry Regulatory Authority (FINRA) and several other self-regulatory organizations.  Interactive Brokers does not endorse or recommend any introducing brokers, third-party financial advisors or hedge funds, including A Sling & A Stone.  Interactive Brokers provides execution and clearing services to customers.  None of the information contained herein constitutes a recommendation, offer, or solicitation of an offer by Interactive Brokers to buy, sell or hold any security, financial product or instrument or to engage in any specific investment strategy. Interactive Brokers makes no representation and assumes no liability to the accuracy or completeness of the information provided on this website.

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