Imagine this scenario: You haven’t been feeling well, so you decide that a trip to your doctor is in order. After the exam, your doctor writes out a prescription for Drug A. You then proceed to the local drugstore to fill your prescription.
Two weeks later, you discover that your doctor moonlights as a pharmaceutical sales representative for the same company that makes Drug A. So by prescribing Drug A for you, that doctor received a commission from the drug company.
What’s your first reaction? Is it one of skepticism? Do you question whether or not you really needed Drug A? Perhaps you’re thinking that maybe the doctor simply prescribed the medicine, being incentivized by a commission?
Now this scenario is really hypothetical, since in the real world, physicians are held to a very high standard (and then there’s that Hippocratic Oath thing). Besides, this type of behavior is completely unethical and would be frowned upon in the business world.
But interestingly enough, in the financial world this practice happens every day by professionals who are called “dually registered advisors.”
A dually registered advisor acts as both an investment advisor and a broker (registered representative). These professionals technically have a fiduciary obligation to manage your assets in the most prudent manner possible. But in doing so, they execute your business directly through their brokerage firm, and in turn, collect commissions on those transactions.
You’ve probably seen those flashy commercials for financial firms on TV, where at the end of the commercial there’s a disclaimer that is read by what seems like an over-caffeinated auctioneer. Rarely does anyone ever pay attention to that disclaimer, but if you listen closely you can learn some important information about how the advisor is paid.
The typical financial ad ends with a disclaimer that sounds 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.
Did you catch all that? Want a simple translation to the disclaimer? Here’s the translation: This advisor is dually registered.
So how can you find out if your own advisor is dually registered? Just ask. In particular, you want to ask about the individual’s exact professional status as an investment advisor or a broker. It doesn’t matter what random title their firm has given them (financial representative, account executive, financial consultant, wealth manager, etc.). Your job is to ask if they are an investment advisor or a broker.
It’s also important to ask your advisor exactly how they’re paid. Do they receive commissions from products that are sold or do they receive a fee for investment advice?
It’s just my opinion, but an advisor who receives commissions may possibly have something other than your best interests in mind. For example, do you really need that variable annuity, or does the “independent advisor” just want the big sales commission?
Do your homework and find out how your advisor is being paid. It will make a big difference.