Q. This is an area that the SEC has indicated a big interest in lately… what are “dually registered” advisors?
A. These are folks who work for both registered investment advisors and registered broker dealers. Historically, your financial advisor was usually one or the other – either a stock broker who earned fees on your trading activity, or an investment advisor who was paid a flat amount per year. Dually registered advisors wear both hats.
Q. And what does that mean for investors? Why is the SEC taking a hard look at this area?
A. The concern is that there’s a lot of room for conflicts of interest, especially conflicts of which the client is unaware. If an advisor is getting paid a 1% per year fee to manage an investor’s account as an RIA, he could – wearing his BD hat – also be taking placement fees from sellers of financial products, or maybe steering trading volume through the BD and getting some compensation for that.
Q. But this is legal, right?
A. Oh yes. Now, there’s a lot of disclosure involved – dually registered advisors have to disclose their role to the client, and there is some standard language that highlights the potential conflicts… but, in fact, the area is growing pretty quickly, especially among advisors leave the big wirehouses and setting up their own shops.
Q. And what’s the argument for this sort of arrangement? At first blush it sounds like all downside for the client…
A. Well, first off, the dually registered advisor does have a fiduciary duty to the client and is supposed to be acting in his interest. Second, the argument is that this gives the advisor a lot more flexibility in how he does business, that he can actually achieve lower total costs than dealing with an outside BD to clear the trades, and that he can lay hands on for his clients, etc.
Q. So, what exactly should an investor be looking for?
A. Here’s the shorthand trick. If you’re with a “fee only” RIA, he’s not dually registered… he makes all his money directly from the advisory fees you pay. If your guy is “fee based”, then its time to understand exactly where else he’s making his money, when and how.