Financial Advisors and “Dual Registration” – Understanding the Jargon

When people ask me what I do, it’s easy enough to respond “I’m a financial advisor.” But the technical explanation as to how my organization operates is more complicated. I figured why not write an article about it because it reflects an industry trend and may be interesting to my clients and other readers. My firm (Premier Wealth Advisors, LLC) is an RIA (Registered Investment Advisor) which provides fee-based advisory services. However, we are also licensed as registered representatives of First Allied Securities, Inc., an independent broker/dealer firm. Through First Allied we are able to offer an additional array of commission-based products including life insurance and annuities. While fee-only advisors are the rage these days, I thought it was important to be dually registered so that I can continue to offer a full slate of investment and advisory products and services to my clients. Why send my clients to another advisor to buy insurance when we can do it here? As a comprehensive wealth management firm, our clients should be able to get everything they need here from investment and insurance services to tax and estate planning.

 A recent article from Financial Planning magazine’s website discusses this topic and points out that from a compliance standpoint, the dually registered advisor has more potential issues to deal with. A fee-only advisor may not have to register with FINRA and therefore may have more flexibility with their advertising, marketing, and record-keeping requirements. In fact, the SEC noted earlier this year that dually registered advisors can expect increased scrutiny from its examiners in 2014. One of the central tenets of that scrutiny is likely the fact that dually registered advisors can steer clients into either a fee-based (advisory) account or a traditional brokerage account with commissions. Regulators have different standards of care for each of those account types and it can get sticky if advisors are operating under both a “suitability” and “fiduciary” standard.

The best practice for advisors is to operate under the fiduciary standard – always doing what is best for the client, rather than trying to argue suitability when there may be a lower-cost or more effective solution for a client.

The SEC has also expressed concern about reverse churning, the practice of charging an advisory fee without providing a significant enough level of service to justify those fees. One way of tracking that would be the frequency (or infrequency) or trades placed within a fee-based brokerage account. Frequency of trades is of course not the only way of analyzing the advisory relationship as financial planners deal with an array of complex issues covering a client’s financial life – the investment transactions which they process is just one aspect.

Also interesting is data from Cerulli Associates which notes that the dually registered space saw the largest influx of assets in 2012. That makes sense to me as many advisors hope to reach the “pure RIA” model at some point but often are hesitant to give up their ability to offer commission based products at first. I’ve spoken with many financial advisors who expressed this mentality.

In the end, disclosure to the client is probably the most important take away from this. These issues are complicated to a client so pointing out the benefits and drawbacks of each option would be an excellent thing to do. In fact, many advisors are doing this through disclosures in their ADV which must be furnished to clients. Unfortunately, like many others businesses, clients often skip the fine print and rely on simple explanations from their advisors.

In the end, operating under a fiduciary standard will generally be the most beneficial way to handle a client relationship. It can also help build the trust which grows an advisor’s business through positive relationships with their clients.

As always, feel free to reach me with any questions or concerns.

Russell Bailyn

Vice President & Wealth Strategist
Premier Wealth Advisors, LLC
14 E 60th St. #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
Author: Navigating the Financial Blogosphere

Securities offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Financial Planning offered through First Allied Advisory Services & Premier Wealth Advisors, Inc. Premier Wealth Advisors, Inc is a Registered Investment Advisor. First Allied Securities & Premier Wealth Advisors, Inc. are not affiliated entities.

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