Let’s lay out a hypothetical situation here: You haven’t been feeling well and decide that a trip to your doctor is in order. After describing your symptoms to the doctor, they decide to prescribe you Drug A for treatment. You thank the doctor, fill your prescription and move on. Two weeks later, you find out that your doctor is also a pharmaceutical sales rep for the company that produces Drug A. They received a commission for prescribing it to you. This leads you to wonder if you really needed Drug A at all or if the doctor just wanted a commission?
The hypothetical doctor-pharmaceutical sales rep hybrid is, of course, not real. That would be completely unethical. However, something too dissimilar exists in the financial industry: dually registered advisors. You also want to be wary of fee-based advisors, as they are not the same as fee-only advisors (like Mullooly Asset Management).
Peter Mallouk of Creative Planning in Kansas City, MO was recently quoted describing dually registered advisors on Business Insider saying (emphasis ours):
“Many clients hire an ‘independent adviser’ only to find out the independent adviser is also a broker…Many advisers are leaving big firms like Merrill Lynch, Wells Fargo, etc. and going ‘independent,’ but they are also staying brokers. This is an extremely dangerous adviser — because this adviser can say they are an investment adviser and is held to the fiduciary standard and would be telling the truth. But the same person can switch from being an investment adviser with a fiduciary duty to act in your best interests to a broker who can sell you something and not act in your best interests in the same conversation.”
On a similar note, if you’re from the New York/New Jersey area you’ve probably heard a radio ad pumping a guy who claims to be “your financial quarterback”. If you listen closely to the rapid fire disclaimer at the commercial’s end you can uncover valuable information about how this advisor is compensated.
The typical financial radio advertisement will end something like this: “The advisor may or may not use discretion in their practice and therefore may or may not manage their client’s assets. Securities offered through (name) Financial, Inc., Member FINRA/SIPC. Advisory services offered through (name) Advisors, Inc. And (his name) Advisory Group and the brokerage firm are unaffiliated entities.”
If you can concentrate hard enough to make out those sentences, congratulations. But chances are you don’t know what any of that jargon means. Here’s the translation: This advisor is dually registered as both an investment advisor and a broker (registered representative). They (technically) have a fiduciary obligation to manage your assets in the most prudent way possible, but are also going to transact your business through their brokerage firm and receive commissions.
How do you find out if an advisor is dually registered?
Ask them! Specifically, you want to ask them about their exact professional status as an investment advisor or a broker. It doesn’t matter what arbitrary title their firm has given them (financial representative, account executive, financial consultant, etc.), you want to know: are you an investment advisor or a broker?
It’s also important to ask your advisor how they are compensated. Do they receive commissions from products that are sold or do they receive a fee for investment advice? It’s just our opinion, but somebody who receives commissions might have something other than your best interest in mind. For example, do you really need that variable annuity or does the “independent advisor” just want the fat sales commission attached to it?
Do your homework and find our how your advisor is being compensated. It makes a difference!