Dually-Registered Advisors: The Quasi-Fiduciary

by | Dec 16, 2014 | Asset Management

We frequently discuss the differences between brokers and investment advisors here at Mullooly Asset Management. Whether it’s in our posts, on our podcasts, or in our videos, you’ve likely heard our opinion before, and know that we’re fee-only investment advisors.

To review, brokers are held to a standard of suitability, meaning they can put their interests and the interests of their firm ahead of the clients’. Investment advisors have a fiduciary responsibility to their clients, meaning they must put their clients’ interests ahead of their own. The brokerage model is flawed in that it allows the brokerage firm’s sales force (brokers, financial advisors, etc.) to sometimes push questionable financial products on unwitting investors. The incentive for doing this lies in their compensation: commissions.

If somebody fully understands the brokerage model/how it works, and decides that it’s the way they want to invest, that’s their decision and I think that’s okay. However, a huge issue is when people don’t understand the model. They believe they’re being given unbiased advice when, in reality, that may not be the case. This scenario plays out a lot when dually registered advisors are brought into the equation.

Dually registered advisors are allowed to collect a fee for assets under management (like most registered investment advisors) and also commissions for the sale of products (like brokers). Sound confusing? That’s because it is.

I like to think of dually registered advisors as quasi-fiduciaries: they’re kind of, sort of, sometimes fiduciaries. Josh Brown recently noted that James Osborne of Bason Asset Management calls dually registered advisors, “Fiduciary When I Feel Like It”. This is a very accurate description of what they are. They’re allowed to change teams whenever they want: sometimes they’re a salesperson and sometimes they’re an investment advisor. It’s up to you to decipher whether you’re talking to Dr. Jekkyl or Mr. Hyde.

In Josh’s book, Backstage Wall Street, he discusses the dual business model stating:

“This is one of the dirtiest secrets in the business, and only the fractured community of purely independent advisors has an interest in shining a light on it.”

Sadly, dually registered advisors have been pretty successful at blurring the lines between fiduciaries and the brokerage firm sales force to the the average investor.

Here are some startling numbers from a 2010 study performed by Infogroup/ORC that were also shared in Josh’s book Backstage Wall Street:

“- Two out of three U.S. investors (including 70% of 45-54 year olds and 62% of college graduates) are incorrect in thinking that stockbrokers are held to a fiduciary duty.
– Some 76% of investors are wrong in believing that financial advisors – a term used by brokerage firms to describe their salespeople – are held to a fiduciary duty.
– By contrast, 75% of investors think the fiduciary standard is in place for financial planners, and 77% say the same about investment advisors.
– Over three out of five American investors mistakenly believe that stockbrokers are investment advisors.”

Those numbers may or may not have changed since 2010. In just over 4 years, my guess would be that no dramatic change has occurred. It’s my opinion that a lot of this is due to the dually registered advisory model.

If you don’t know whether your advisor is dually registered or not, here’s a clue: If they collect a fee for assets under management and also make commissions from selling you mutual fund A shares or variable annuities, they’re dually registered.

Unfortunately since this model of business is permitted, it’s up to the investor to ask questions and many don’t. Make sure you clearly understand how whoever you work with is being paid. I don’t think it’s right for somebody to collect a fee for assets under management and sales commissions. How are investors supposed to know whether a dually registered advisor’s recommendations are genuine or a sales pitch? These guys should pick a side, fiduciary or non-fiduciary. Enough of this quasi-fiduciary stuff.




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