Investment advisers who also are registered as brokers are rife with conflicts of interest and charge their clients more than independent RIAs, according to a new academic study.
In a
paper released on Wednesday, Nicole Boyson, professor of finance at Northeastern University, finds dual registrants "have numerous conflicts of interest," including cross-selling of insurance products, revenue sharing with third-party mutual fund families and selling proprietary investment products.
She also found dual registrants charge an average of 2.1% on assets under management, much higher than the 1% fee assessed by most registered investment advisers, and are more likely to be the subject of disciplinary actions by securities regulators.
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"The most obvious policy implication of my study is that dual registered investment advisers — who are required to act as fiduciaries — often fall short of the spirit of the fiduciary standard," Ms. Boyson wrote in the paper. "While these advisers mostly meet the letter of the law (frequent disciplinary actions aside), their conflicts, high fees, and poor investment management performance imply that they are not serving their clients' best interests."
Ms. Boyson examined the ADV Part I filings of 6,866 unique RIAs — 2,484 who were dually registered and 4,382 who were independent — from 2003 through 2016. She also reviewed ADV Part II narrative filings for the top 75 dual registrants and independent RIAs for each year since 2011.
Investors should "do their homework" and dig into the ADV forms before hiring an adviser, Ms. Boyson said in an interview.
"Retail clients should be aware that dual registrant firms have these significant conflicts and that they likely will be asked to pay more [in fees]," she said.
A trade association whose membership of independent broker-dealers and financial advisers is mostly comprised of dual registrants defended the business model.
"Our members continually work to ensure they are providing the best service and advice to their clients," David Bellaire, executive vice president and general counsel at the
Financial Services Institute, said in a statement. "They help their clients achieve their financial goals and build a financially secure future. Dually registered advisers offer truly holistic advice."
A 2007 ruling by a federal court of appeals forced brokers to convert their fee-based accounts to advisory accounts that require registration as an investment adviser and adherence to fiduciary duty.
But toggling between the brokerage and advisory side of a practice often raises questions about the advice standard being met. A
new broker standard recently approved by the Securities and Exchange Commission has been criticized for not doing enough to address so-called hat switching.
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A former dual registrant said Ms. Boyson's study rings true with him.
"Higher fees and more conflicts of interest are prevalent on that side of the business, and that's why I ended up leaving," said Russ Ford, founder of
Wayfinder Financial.
Mr. Ford worked for six years — until this May — for a dually registered firm where he was an investment adviser, a broker and an insurance agent. He said he grew tired of the pressure to sell certain products to meet a quota.
He never put a client in a product that was bad for them, Mr. Ford said, but he did search for clients for whom the products would be a good fit — a distraction that kept him from the being the kind of adviser he wanted to be.
He is in the process of establishing his new firm, where he will dispense advice by charging a fee based on his clients' net worth.
"I should line up my business model with my values," Mr. Ford said.
