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Dually Registered IA & Brokers Dealers: A Common Combination, But Is It In the Best Interest of Clients?


Dually registered investment adviser/broker-dealers are fairly common in the industry. This type of arrangement allows for the registered entity to offer both transactional and fee-based services, theoretically, based on the needs of the client. With Regulation Best Interest (Reg BI) on the horizon, it may be that the SEC sees the practice of dual registration causing issues, as evidenced by a recent litigation release. The question for the industry seems to be if there’s any issues with dual registrants, and how to ensure the best interest for a client? 

Dual Registration Intent

The purpose of the investment adviser is to act as a fiduciary in the active management of an individual’s assets. But, what does active management mean? We can boil it down to a few general expectations:

✔ Investing in products that meet client’s investment needs and within their tolerance for risk.

✔Monitoring the account to ensure previously purchased products are still in line with a client’s objectives and tolerance for risk.

✔ Buy and sell products within the account according to the client’s needs and tolerance for risk.

For these services the adviser receives a fee based on the value in the client’s accounts. 

The purpose of a broker-dealer is to facilitate trading for its clients. Theoretically, the broker dealer representatives provide similar services as an investment adviser, but the broker dealer representative’s role is more in line with making recommendations and facilitating trades, for which they receive a commission on each trade made in the client’s account.

When the two roles are combined, dually registered investment adviser/broker-dealers have an ethical obligation to recommend the service that is in the best interest of their clients. Specifically to the advisory role, they are a fiduciary to the client and are bound legally to recommend the service that’s in the best interest of the client. 

Simply put, clients who will be actively trading and require more hands-on management should be placed with the investment advisor and clients that really just need to invest in a balanced portfolio of products, and do not require a great deal of management and trading should be placed with the broker/dealer. There are instances where investment adviser/broker-dealers will do just the opposite. The reason? It allows for greater profitability for both the reps and the registrant. Although this activity may not be a violation of the letter of the law, it is a violation of the spirit of the law, and a violation of the investment adviser’s fiduciary duty. 

Is Government Regulation Helping?

The new Reg BI rules issued earlier this year, state that “broker-dealers will be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.” It appears this is actively being enforced. In September, the SEC brought charges against a firm that was acting as a dual investment adviser/broker-dealer. The firm is thought to have chosen an investment “that carried significant transactional sales charges” despite another equally viable option available without those costs.  Essentially, the firm “reaped the benefits of the transactional sales charges” while violating their “duties to seek best execution and to disclose all material conflicts of interest.” In this particular case, the regulations worked to discover and bring litigation. But is there a way to prevent this situation, saving potential harm to clients or to the trust status of investment adviser firms?

There are many who believe that government regulation isn’t helping. The belief stems from when regulators come up with a new rule or regulation, seemingly every time they catch someone in a new scheme taking advantage of their advisory roles to maximize profits, while hurting clients. The question is if regulators can find a way to be smarter or more efficient? Perhaps a common sense approach to regulation could be drafted in a manner such that those who are required to comply, understand without the government interpreting the regulations for them (many times the interpretation is just as convoluted as the rule itself). Realistically, we may be far from that possibility.

A Common Purpose for Regulation

While we may not have the answers we hope for, investment advisers do have a universal belief that those who line their pockets with profits via unethical methods hurt clients and the entire fiduciary platform advisers stand on. We also see that while the SEC and several states may be taking an interest in Reg BI, there are also private companies that are fighting on behalf of investment adviser for equal fiduciary duties amongst brokers. With several avenues for regulation or even self-regulation, the path forward may be for all to act as trust agents to their clients, and by consequence, for the best interest of the industry’s reputation.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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